Netflix: Riding a death spiral to insolvency?
Reed Hastings' miscalculations, stubborn way and penchant for hefty spending will doom his company.
By Rocco Pendola
Netflix (NFLX) CEO Reed Hastings uses plenty of smoke and mirrors to spin a positive story. He has a way about him that creates the false perception that Netflix sits in the driver's seat -- in a space populated by loads of new players and a still wildly successful old guard (TheStreet).
One of Hastings' latest memes, gobbled up and passed along to clients, CNBC anchors and the general public by Wall Street analysts: Netflix uses the treasure trove of viewing data it collects from its subscribers to make better-informed decisions on what type of content to license and produce.
As per usual, Hastings' public perspective only tells part of the story.
There's no doubt Netflix can analyze the content its subscribers watch and use it to guide future buys. Of course. But this data isn't nearly as valuable as Hastings would have you believe. That's primarily because the hours of viewing statistics Netflix looks at represent just a relatively small portion of the overall content Netflix subs view. I feel comfortable making this assumption -- much more comfortable than I do simply accepting Hastings' contention that he has some sort of edge because he can analyze Netflix usage habits.
In some cases, I argue, the analysis of these numbers exposes one of Netflix's inherent weaknesses: It cannot secure premium content if it continues to effectively give it away -- unlimited -- at its $7.99 per month price point.
I'll relay two pieces of information to support this contention.
First, the one that practically every analyst chose to ignore and somehow managed to spin positive. You have to go back to mid-2011 for this.
Sony (SNE) pulling its content from Netflix as part of the latter's deal with Starz. And Starz's subsequent move to not negotiate a new contract with Netflix.
On its company blog, Netflix referred to the Sony thing as a "temporary removal." Not true. At the time, over on Seeking Alpha, I defended Netflix against the notion that it did not properly warn investors that something like the Sony move could take place. It did, quite clearly, in the risks section of its annual reports.
But it was not forthright about the real reason for Sony's choice. Simply put, Netflix's subscriber base grew too large; as such, Sony did not want to continue providing all-you-can-eat content for $8 a month. That aligns pretty much perfectly with Starz's rationale to later cut ties completely with Netflix:
This decision is a result of our strategy to protect the premium nature of our brand by preserving the appropriate pricing and packaging of our exclusive and highly valuable content. With our current studio rights and growing original programming presence, the network is in an excellent position to evaluate new opportunities and expand its overall business.
In the first sentence, Starz illustrates a major Netflix conundrum -- it cannot attract premium content with its current pricing scheme in place. Thus it's desperate and unsustainably expensive move into original programming (TheStreet). In sentence two, Starz reaffirms the reality that content owners hold the cards in relationships with glorified bootleggers such as Netflix (TheStreet).
Fast forward to April 2013. Something I experienced over the weekend proves that nothing has changed. I discovered and watched the first two seasons of comedian Louie C.K.'s excellent FX show "Louie" on Netflix. The other night I wondered about the availability of season three, so I searched for it via the excellent Roku 3's upgraded interface.
Come to find out you cannot get season three on Netflix streaming (it's available on DVD); however, for $19.99 in standard definition and $29.99 in high-definition, you can secure it through Amazon.com's (AMZN) Prime Instant Video or Wal-Mart's (WMT) streaming service Vudu.
I bet Netflix's crunching of its numbers shows viewers lapped up the first two seasons of Louie. Excellent! So, if you're News Corp's (NWSA) Fox Entertainment Group, owner of FX, you take that same data and make your decisions on how to license to season three.
It should come as no surprise that the content owner went with Amazon and Wal-Mart's on-demand options over the Netflix $7.99/month, unlimited viewing option. Sony and Starz made this dynamic clear in 2011.
Netflix has been able to survive since then, thanks largely to a mix of cash bailouts and that way Hastings has about him. But part of Hastings' aura contains a stubbornness of epic proportions. And his refusal to include tiered pricing and/or on-demand options, amidst massive spending on originals and international expansion, will doom Netflix to insolvency.
More from TheStreet.com
Most of us are patient. That's why movie theaters are becoming ghost towns all around the country.
Nobody wants to pay the outrageous prices to see a movie when it first comes out and pay $7.00 for a box of popcorn. We'll wait till it goes to video and watch it for $3 at home with our free popcorn.
Most of the movies today don't compare to the movies of the distant past anyway. Without special effects and 3D, they are boring at best. Watch an old Hitchcock movie without any special effects and it will keep you spellbound from beginning to end.
Well I won't be ditching my Netflix anytime soon. I can't afford the pay on demand and other options that the money hungry studios come up with.
This article reads like an idiot wrote it!!
Who does a stock analysis based on random assumptions? "...the hours of viewing statistics Netflix looks at represent just a relatively small portion of the overall content Netflix subs view. I feel comfortable making this assumption..."
The writer feels "comfortable" making up whatever facts he wants to in order to make a case. Pathetic.
It seems that about every two weeks MSN has a negative article about Netflix. It's like they are running a campaign to try to convince people that Netflix is going under.
I also am well aware in business that its common practice to negotiate, then blame the other party for an unsuccessful negotiation. I don't believe for a second that Sony and Starz were protecting the reputation of their programming. Its quite obvious that Netflix just didn't meet their price demands.
I'm no fool. Netflix financially is a train-wreck, but the basis used here for predicting the future of the company is flawed in my opinion.
Nothing original has been produced in a long tim from hollywood!!! Must be the medical gange!! Killed ALL the creative thoughts! Now its just Re making movies from the past.. Or doing comic books. anyone who has an original thought is"dangerous to the thoughtless people who controll the money or the positions" and are afraid of being "outshined by someone in Tinsel Town!!! But thats the culture of "Everyone is SPECIAL.. and get a trophy... Even when they are really BAD!!!!!
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