Netflix, LVLT, How the recent price change will affect their relationship?

Recently Netflix announced a step price increase and effectively separated their online streaming and traditional DVD by mail business models.  Initially this caused an revolt by even its most loyal subscribers.  People in general hate change but usually calm down after the hype has disappeared and  calmer heads prevail.  The efficiency that customers have experienced from not having to wait for their DVD's to appear in the mail has gained more customers than they will lose after separating the two.  I believe the price increase will have a revenue increasing situation for the company.  Netflix answers the revolt by announcing new deals that will increase their large inventory.  This will give its online subscribers more choices for less than the cable company charges for a premium channel.  Netflix is still able to serve the DVD crowd that was the core of its business model and pay the higher cost associated with it.  The greatest benefit for the company is that it separates the higher return online subscribers and the lower profit subscribers to the DVD service.  It also gives its subscribers an incentive to become online streamers.  This should increase rather than decrease the online subscribers.  Therefore the demand it generates for LVLT's Services will only increase.    

Customization of the Burger

As customers become more educated of menu ingredients they are going to begin demanding new and exotic plants, fruits and vegetables.  As people also become aware of the processing much of the pre-prepared meals undergo to increase their shelf life.  Farm fresh vegetables, organic choices and gluten free diets are becoming lifestyle choices rather than trend diets.  Freedom of choice or customization is also becoming a growing trend.  Just look at the growth of small sandwich shops(Subway, Quizno's) that feature unlimited combinations of flavors, fresh vegetables, fresh bread and protein options.  Buffalo Wild Wings has traditional fast food items paired with unlimited sauces, choices in sports and teams, and a wide selection of beer, liquor and even wine.  Neighborhood cafes, restaurants and coffee shops are once again social gathering places.  Social media can let hundreds of people know their personal recommendations.  People now gather at coffee shops to write their blogs, post their whereabouts on Facebook while they shop for clothes.  The internet has even changed when people eat because the 9-5 factory jobs are gone and office workers find that they have as much to do form their internet connected office at home as they did at work.  Many of todays students take their college classes online at their leisure.  

Apple (APPL)

Watch Apple (APPL) this week 9 JAN 2011 as Verizon Wireless (VZ)  will finally announce the launch of the iPhone on the Verizon network.  The expectations are high that Verizon is going to leach users away from AT&T(ATT).  In order to make the switch even better; Verizon is offering unlimited data plans instead of the usage model AT&T now uses.  When the iPhone debuted at AT&T, the company experienced  growing pains from the amount of new customers and the added data usage the iPhone devours.  Verizon says they are confident their network has plenty of room grow.  Regardless of which wireless carrier best services Apple's iPhone.  Apple is a winner!

There are so many speculators out there trying to guess how many iPhones Verizon will sell for Apple.  I am not going to get into the guessing game (9-14 Million), but I believe it is going to be on the high side.  If Verizon does not crash its network by adding too many data hungry phones too fast, they should become Apple's salesperson of the year.  

Natural Gas vs. Electrical Vehicles

Re-Fueling Stations: Both have home charging stations. But everybody who has a home has an electrical outlet.  Compressed Natural Gas (CNG) has a recharge unit for home use, but not everybody has access to natural gas in their homes.  The CNG unit also comes with an initial cost.  Electrical Vehicles (EV's) can be recharged in more places than CNG stations cover.  Initially an extension cord can be ran to the EV.  Eventually it will not be hard to add plug in units to parking areas.  CNG stations come with high initial infrastructure cost.  I think Electrical Vehicles win this one. 

Range: How many times have you been out on the town and your cell phone battery is dead?  Electrical cars practically run on the same batteries.  Those batteries have a lot of new technology and innovation in them but they are still limited, expensive, heavy and inefficient.  Natural Gas engines are not much different than the engines we use now.  Gasoline and Diesel engines can be converted to run on CNG.  CNG vehicles get similar gas mileage to gasoline therefore a full tank will get them just as far.  CNG is more efficient for large delivery vehicles, public transportation, trash collection and fleet vehicles.   I give this one to Natural Gas.

http://pressroom.ups.com/pressroom/staticfiles/media/image/cng_1_high_res.zip

Cost: General Motors (GM) new Volt EV retails for over $40,000 before tax incentives.  Ford (F) has a Hybrid EV that runs on batteries until it runs low, then a gasoline powered generator runs the engine.  It starts at $28,000 before tax incentives.   Honda makes the only mass produced CNG vehicle in America, the Honda Civic GX starting at $25,450.  Cummings Westport has a production CNG engine for the traditional diesel market.  For large vehicles or heavy vehicles, EV is not even an option because of the size the batteries that would be needed.   I would award this column to Natural Gas (CNG) too, BUT...... It seems that the momentum is clearly behind the Electrical Vehicle.            

Chesapeake Energy (CHK)

Chesapeake Energy (CHK)-is the second-largest producer of natural gas, a Top 20 producer of oil and natural gas liquids and the most active driller of new wells in the U.S.  Headquartered in Oklahoma City, the company's operations are focused on discovering and developing unconventional natural gas and oil fields onshore in the U.S. Chesapeake owns leading positions in the Barnett, Fayetteville, Haynesville, Marcellus and Bossier natural gas shale plays (See my Article) and in the Eagle Ford, Granite Wash and various other unconventional liquids-rich plays. The company has also vertically integrated its operations and owns substantial midstream, compression, drilling and oilfield service assets.


Bullish Ideas: 

• Expansion of Consumption: One of the reasons Natural Gas prices are at all time lows is that there is more supply than demand. Petrohawk is at an advantage because demand is growing inside of the Haynesville shale allowing Petrohawk to provide NatGas more efficiently by reducing transporting across long pipelines. AEP has recently built a Modern Natural Gas Electrical generator in Shreveport LA. 
• Natural Gas CNG Transportation Use:  Federal tax credits offered in Transportation bill.  Bossier City LA has installed first of two CNG pump stations for Vehicles. Chesapeake Oil and Gas (CHK) and city vow to move vehicles to CNG consumption.  UPS deploys new fleet using CNG and plans further expansion.  
• Environmental: Burns cleaner than conventional gasoline.  President Obama offers to back Pickens Plan during speech. Tax incentives for Nat Gas long-haul engines have been included in the latest Transportation Bill.  The reasons go on and on. Its almost impossible to list them all.  
• Environmental Activist Carl Icahn recently revealed a 5.8% stake in (CHK). This is could run the stock up in the short term as the money follows the man.  Carl Icahn has not made it clear if he is in the stock because of its potential value, or as an environmental stance.  He could also try to assert pressure on the management to continue its focus on exploration and expansion.  
• China: OK this is a new one for a lot of people but The United States could actually be an energy exporter! Two companies that I know, Cheniere Energy Partners (NYSE:CQP) and Freeport of have applications into the US Energy Dept to begin Export of Natural Gas. 
• Bossier Shale: Don't get the Haynesville shell, and the Bossier Shale confused. (Read My Article)

Bear Ideas:

• Management practices:  President Aubrey McClendon's management of the company has been questioned by many investors.  Expansion & Expansion has been the public philosophy of the company.  Some investors are suggesting that the focus should be efficiency in production until Nat Gas Prices rise.   
• Supply & Demand: Supply could continue to expand faster than demand.
• Infrastructure: There is not much room to rapidly expand pipeline transportation, Long-Distance Pipeline transmission increases production cost. LNG and CNG technology expensive and Massive in size and price.
• Nat Gas Stations: Or a lack of have made the switching to CNG impossible except for fleet vehicles in close proximity. There is a chicken and egg argument here: what comes first? (Read my Article)
• Nat Gas Vehicles: not a consumer option. Ford (F) and General Motors (GM) are pursuing development of electrical vehicles. The car companies put up a lot of money developing electrical cars and will therefore stall any other environmentally friendly vehicles from production until they have recovered the cost of these investments.
• Taxes Paid on Diesel will drop resulting in large losses of tax revenue for state and federal transportation budgets as a result of more efficient vehicles reduces government incentives to truly embrace conversion to NATGAS.

Level 3 Communications (LVLT)

Level 3 Communications (LVLT)-is an international communications company headquartered in Broomfield, Colorado. The company operates one of the largest communications and Internet backbones in the world. 


Bullish Ideas:

• Reached agreement with Netflix (NFLX) to be primary content delivery service and will host the Netflix content library on its servers.  
• Infrastructure investments have been made with future expansion in mind.  Level 3 can continue to add customers without having to upgrade infrastructure.  After this company becomes profitable it can achieve high profit margins  
• Streaming HD movies, TV Shows, and games will continue to drive internet traffic creating more demand for Level 3 Content Delivery Systems.  
• Net Neutrality Rules: This is going to be a bullish and bearish Idea.  Let me explain..... The FCC passed a rule change/clarification on 21 DEC 2010.  It forces all but wireless broadband providers to deliver all traffic generated on the web.  It also allows ISP's to prioritize content delivery.  This guarantees that Level 3 traffic must be delivered to end users.  It will also allow Content Providers to pay in order to move its content to the front of the line speeding its delivery.  This is going to provide Level 3 a lot of press coverage as these issues are tried in the courts and in the new Republican Congress.   
• Level 3 has been the Content Delivery Provider for the NFL's Global Superbowl Broadcast.
• COAL? -Yes, LVLT derives income from a coal subsidiarity and coal prices have risen drastically due to rising demand in China, India and the United States." Level 3, through its two 50% owned joint-venture surface mines, one each in Montana and Wyoming, sells coal primarily through long-term contracts with public utilities. The long-term contracts for the delivery of coal establish the price, volume, and quality requirements of the coal to be delivered. Revenue under these and other contracts is generally recognized when coal is shipped to the customer."    

Bearish Ideas:

• Profitability has never been achieved: Not much to add to that.  They are not making more than they are spending.
• Net Neutrality Rules:This is going to possible raise the cost of business, but it also guarantees access to ISP's.  This is a bearish idea if you are looking for a stable stock play.  I think this is going to create some volatility, because the FCC's rules and their ability to enforce them, are going to be tested in the courts, and is likely to become a political fight in the new Republican Congress.
• Shrinking Land-line Telecom Business: The land-line business is shrinking fast.  Level 3's long distance and voice services makes up 15% of revenue but has begun shrinking fast. 
• Insiders recently sold shares.  In Jan 4th filings 4 insiders sold shares.  Not substantial amounts but it always makes me wonder?              

Bossier Shale, Don’t get it confused with The Haynesville Shale!

The Bossier Shale could potentially affect the value of thousands of acres of land already held by Independent Oil and Gas Produces such as Petrohawk (HK) and Chesapeake (CHK). The Bossier Shale is an entirely separate geological play, in the same geographical area of the Haynesville shale, that is producing a lot of Nat Gas. Does this mean the supply held in this region is twice as much as already calculated? Does this make the Leaseholds twice as valuable? Or could this be the supply that floods the market and depress an already historically low price? This could also ruin the value of both companies by futher saturating the market with new Natural Gas supplies. Massive Underground Storage Facilities have record inventories due to production increases from unconventional shale plays. A new Technology in Drilling called "fracking" is opening up shale gas plays across the country. The Haynesville Shale is said to be the largest gas find in the lower 48 states.
All the players in this shale seem to be tapping into it. They are releasing their results but have not seemed to bolster the news with much fanfare. There has been a lot of insider stock buying going on across the industry. Future Options are bullish on Petrohawk (HK) partly because of the under-valuation of the company and its potential as a takeover target by cash rich oil and gas giants. Chevron recently announced it takeover of Atlas energy. Carl Ichans has announced that he had purchased a minority interest in Chesapeake (CHK). It could be a value play on his part or he might be taking an environmental stand. Either way benefits all the Natural Gas producers. Even the depressed price on Nat Gas has not slowed down drilling to protect leaseholds. That could be interpreted that that is a strong indication that these companies are confident in their futures.