Neil Macker: We recently examined the subscription video on demand, or SVOD, marketplace. In the U.S., this marketplace is dominated by three providers: Hulu, Amazon Instant Video, and most famously, Netflix. Both Netflix and Amazon now offer services in almost every country in the world, with a few exceptions--the key one being China. As a result of our research, we see five key challenges to Netflix's valuation as it expands globally.
First, the battle for content continues to heat up, and the battle for better content will affect margins negatively. Second, SVOD complements, rather than replaces, the paid-television bundle for many subscribers. Third, competition for content will increase as Amazon expands globally, and targeted SVOD platforms continue to launch. Fourth, Netflix's skinny offering may have limited appeal in many markets and will be challenged by Amazon's lower-priced bundle, which has launched recently. Finally, Netflix's valuation depends heavily on its ability to quickly ramp up the operating margin and its international segment without increasing churn.
Given these challenges, we continue to prefer wide-moat media stocks such as Walt Disney Company and 21st Century Fox. We believe these firms are well-positioned to survive and flourish in this changing media landscape. Fox and Disney are both trading below their fair value estimates and we believe offer an attractive entry point for investors.