Monday, September 26, 2011

The Netflix Gamble

Netflix stock was trading at around $295 per share in July 2011. Now, Netflix stock is at around $130 per share. What happened?

Three big things happened.
  1. Netflix split the pricing for streaming and DVD mail services. The streaming service price stayed the same, but it was no longer free with the DVD mail service. Also, the DVD mail service went up in price.
  2. Netflix failed to renew its Starz contract for streaming, which included Disney and CBS content.
  3. Netflix officially splits its streaming and DVD mail services. The streaming content will remain Netflix and the DVD mail services will be called Qwikster. Separate accounts are required.
This lead to Netflix losing customers. 600,000 lost customers by the time this quarter ends in September. Netflix thought they would be adding 400,000 customers this quarter. 

Was it smart for Netflix to focus on streaming? Yes. They have to be aggressive about their streaming service, which they have been. The DVD mail service, while profitable is stagnant and investors hate stagnation. The only room for growth for Netflix is the streaming service.

Was the approach of Netflix smart? No. Netflix could have split its streaming and DVD mail services without raising any prices. Losing free streaming is a big blow for Netflix customers; there was not a need to exacerbate the situation by increasing the DVD mail service prices. Like gym memberships, many subscribers pay for a service they do not use enough to justify paying the monthly fee. In a sense, these subscribers are paying for the ability to use these services at their whim. The Netflix board ignorantly avoided to account for these type of subscribers. For when these subscribers, that rarely use their services, are faced with a price increase, they initiate the thought of possibly cancelling the Netflix service. A thought that would not have been there had there been no price increases. Good job Netflix for putting that thought into their heads (sarcasm).

Will Netflix come out on top? Surprisingly, yes. Their focus on streaming is the foundation for a strong future. In the next phase, Netflix must secure the rights to content, without getting too many restrictions (e.g., 90 days after a DVD release) from the big studios. Netflix has started this new phase as they have announced a streaming content deal with Dreamworks, who was previosly paired with HBO.





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