July 13, 2012

Netflix Stock Still Suffering From 2011 Pricing Fiasco

Michael Harper for - Your Universe Online

One year ago today, Netflix shook couch potatoes everywhere from their nesting places and sent them looking for the nearest forum to vent their anger. Not only did they decide to split their DVD delivery service and online streaming service into 2 separate businesses, customers would now have to pay 2 separate prices if they wanted to reap the benefits they had grown so accustomed to. After all, how sweet was it to curate and update your queue, only to suddenly realize the movie you´ve been waiting for is now instantly available online?

It seems many Netflix users had similar experiences, watching what they pleased online and letting the physical DVDs gather dust in their mail pile. To alter this behavior and refocus their business model, Netflix ripped the company in twain and shocked the world.

It wasn´t just the users who became irate, if not confused: Shareholders also became worried as stock prices began to fall almost immediately as many Netflix users cancelled their accounts in a fit of holy outrage. All told, Netflix lost more than $11 billion in shareholder wealth, making the surprise on July 13, 2011 a milestone in Netflix´s relatively short history.

When the dust had settled, the company had lost as many as 800,000 subscribers during the same quarter wherein they announced the price hike and new business.

Though many customers who cancelled in protest have since come back, stock prices remain more than 70% less than what they were a year ago. As of March 31, 2010, Netflix was up to 26.1 million US subscribers, over 2 million more than before they announced the hike. Netflix´s ability to hold on to subscribers, as well as what the company has had to do in order to keep these subscribers has raised some concerns for those existing Netflix shareholders.

It´s likely Netflix was also preparing for what many consider inevitable, the death of physical media: Specifically, the DVD. After all, its close cousin, the CD has nearly disappeared in the wake of digital distribution, be it music, software or otherwise. As internet connections get faster and mobile watching devices become more prevalent, Netflix´s decision to focus on streaming wasn´t entirely a bad one.

All the screens and speed in the world can´t help Netflix's bottom line if they don´t have the content, of course.

It´s long been a joke among Netflix users: Their “New Releases” section is horribly titled as most movies found there were actually released sometime ago. Other movies on the list are simply unheard of to the general public. Since most Hollywood movie studios frown upon having their content available for online-streaming, Netflix has struggled to build up their online movie collection.

Though their subscriber base is up from last year, their most popular service, online streaming, isn´t as profitable as their DVD-by-mail service. To build up a good streaming catalogue, Netflix has had to pay large licensing fees to the studios and TV networks. Even then, if this kind of streaming takes off, the movie studios and TV execs are in a place of power and could raise their rates. For instance, As of March 31, Netflix signed contracts totaling $3.6 billion in licensing rights for the next 5 years. Next April, they´ll sign another $730 million in contracts.

"Smart people question whether they will ever make money," analyst Michael Pachter told Reuters.

"Netflix is growing unprofitably, and content owners who see usage (of video streaming) go up by 50 percent are either going to charge more or offer lower quality content. Either is a drag on the stock."