Netflix recovers from identity crisis

The company appears to be stabilizing its subscriber levels, but it has a lot to prove before it becomes the market darling it once was.

By Kim Peterson Jan 26, 2012 2:03PM
Image: Watching television (© Maria Teijeiro/Getty Images/Getty Images)How many times does Netflix (NFLX) have to say it? The company doesn't want to replace your cable box. It can't afford to compete with everything on television.

Instead, Netflix just wants to be an online premium network. Think HBO on the Web. It wants to offer big original shows that you can't find anywhere else, plus a ton of less significant programming that doesn't cost too much.

That's the company's new business model, like it or not. And the good news for Netflix is that people are coming to terms with it. Subscriber numbers are stabilizing, and so are customer satisfaction levels. Quite a change from the high-drama of 2011, when Netflix seemed to be doing everything it could to outrage customers.

"We are just another network competing for viewing time with, and licensing content from, other networks," CEO Reed Hastings said in a letter to shareholders Thursday.

One analyst points out "blemishes" with Netflix in the following video.

Post continues below.
Still, Netflix has turned a corner. Shares were up more than 21% Thursday to $115.64 after the company surprised with better quarterly earnings than Wall Street expected. Profit and revenue beat expectations. Netflix is now the top stock performer this year, The Wall Street Journal reports.

But perhaps more impressive was that Netflix added 610,000 subscribers in the U.S. in the fourth quarter. That's not enough to match the 800,000 subscribers who dumped the service in the previous quarter, but it's a move in the right direction.

Netflix ended the year with 24.4 million customers in the U.S., nearly 22 million of whom are streaming customers, paying $8 a month. A little more than 11 million pay to get DVDs by mail, and 8.4 million pay for both.

Netflix is done with DVD-only subscribers. It won't spend any more money attracting them or keeping them, and executives expect that category to decline every year.

Instead, the company is putting its money toward international expansion and original content. It has about 500,000 subscribers in Latin America, for example, and has recently launched in Britain and Ireland. It had 1.9 million total international streaming subscribers at the end of the year.

The quarterly performance was solid enough to win back the hearts of many analysts. Several upgraded the stock Thursday, and some significantly raised price targets in anticipation of continued progress from the company. Citigroup's Mark Mahaney raised his price target to $130 from $80, saying customer satisfaction seems to have stabilized.

But other analysts were skeptical. "Our ongoing concerns regarding building competition continue to feed into our longer-term questions surrounding the economic value of a streaming subscriber," wrote analysts from Canaccord Genuity, which is maintaining its "sell" rating on the stock.

Some of the concerns revolve around Netflix's push into developing its own programs, a model HBO has done so well with. Netflix describes its first original series, "Lilyhammer," as a "fish-out-of-water story set in Norway." What if that fish flops? Much is riding on the company's push into original content.

It's too early to say that Netflix is back. The company is certainly better off now than it was six months ago, but Netflix has a lot to prove before it becomes the highflying market darling it once was.

Tags: NFLX
12Comments
Jan 26, 2012 8:46PM
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We were too busy to cancel our Netflix during the holidays. However, come January 31st we will be dropping Netflix. We tried to adjust to the new streaming for the sake of some series' we enjoy, but it was not possible. Episodes 1-4 on disc only, episodes 5-8 live stream, episode 9 (the finale) is only available on disc. How are you supposed to watch something when access is chopped up between two different billed services? We say - shame on you Netflix - shame on you!
Jan 26, 2012 4:46PM
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On november 5, 2011, this same website, msnmoney, posted an article titled, "netflix is a goner", and here we are a whopping 2.75 months later being told by the same source that netflix is the top stock performer thus far for 2012.  I wrote a response on november 5th defending the long term viability of netflix.  Although it has only been a few months, and there is much left to be revealed in the streaming movie business, I must say I feel a bit vindicated....and perhaps even a little smarter than some of the supposed wall street experts. So for all you folks out there who read msnmoney articles and also think for yourselves, I say keep on thinking for yourselves....you may be far more brilliant than you have previously realized.
Jan 29, 2012 10:52AM
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After losing the STARZ television channels and especially the television series, "The Virginian," we dropped NETFLIX and went to Amazon Prime. Not only do they have a better search engine (you can search by actors's name), but you get free two-day shipping on many items, plus the streaming video for a lower cost ($79 annually).
Jan 26, 2012 2:38PM
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Guess the postal system will hurt even more when Netlfix doesn't mail DVDs anymore.  HA
Jan 26, 2012 6:23PM
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Where are all the Netflix haters?

There were plenty here a few months ago.

But just like the people who defended their price change said, they are still a good entertainment value.

Netflix only responded to increased prices charged by content providers. They had to charge more, or cut quality.

And really, what still costs the same today as 5 years ago?

Jan 26, 2012 8:43PM
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Its good to see that Netflix has come to grips with their identity crisis.  But the real question is going to remain, will the CONSUMERS come to grips with it?  Will the consumers continue to pay for streaming content that gets lighter and lighter, and less and less?  Will consumers gobble up a pay subscription service that seems to be leaning towards only original content and/or a very light supplement of other content?  Will consumers pay for a subscription service that only offers B grade movies or movies that are really out of date? 

 

I think subscribers numbers are stabilizing with the expectation that Netflix is going to continue in its current form, ie tv shows, older content etc.  But if its move is to become an "HBO on the net" I think a lot of those current subscribers will jump ship.  I don't see a mass exodus like what occurred recently, but I also do not see current subscribers sticking around if a) there is a move to LESS content with original programming (as Im reading from the article) or b) the current content is all there is and it stagnates. 

 

I know I finally let my membership lapse and I dont think Im going to renew it for the foreseeable future.  I'd like to see Netflix continue.  But I'd also like to see a low cost alternative to cable where people are not screwed in their quest for entertainment.

 

 

Jan 29, 2012 11:25PM
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NETFLIX: the most hated companies in America.
Jan 28, 2012 10:50AM
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When they eliminate DVD only I am done



Jan 26, 2012 6:21PM
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We keep our Netflix for two reasons, we love British TV programming and we go thru a Mystery series as these two elders wakeup thru the evening hrs. We each throw in a oldie but goodie movie now and then.

Speaking for myself, I  love the Docs' from NGS to Nova and the Masterpiece series rarely disapoint. As long as I can get past years in viewing in a short time for this cost I will be a subscriber  as I can afford it.

However, I want to remind Netflix they are, like Tivo and others, on top of the cost of access that is also getting out of control  for this restricted  dead income senior. My business model is set, your choice is if you turn me off or not in the future.

I do not miss the same ole same as DVD availibility as much as I thought, you can only watch so much and we have more time than most.

Jan 28, 2012 10:53AM
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everytime the stock drops inj price I ask my broker..he says hello no than the stock shoots up
Jan 26, 2012 5:00PM
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@nicholsongs: This site has many different writers who all have different takes on a stock. I think that you'd definitely find a split in opinion among investors about Netflix. The video in this post features an analyst who is down on the stock, but there are other analysts and investors who believe the company has a long-term success plan.

So some writers on this site will be bearish on Netflix (or Apple or any other stock) and others will be bullish. Readers are encouraged to agree or disagree, as you did with Netflix. And in the end, as you said, the best thing to do is keep thinking for yourself, research the heck out of something and make your own decisions.

Jan 26, 2012 7:53PM
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I am so relieved. I convinced my husband to invest 10 grand when it was at 250.00 (when I THOUGHT it had bottomed out) and I feel bad that I gave him bad advise. I hope these gains continue. I sure love my streaming Netflix account and thought everyone else would too. 
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