Netflix scrambles for cash
The video-streaming and by-mail DVD company will raise a much-needed $400 million, but at a stark cost.
By Jeff Reeves, Editor of InvestorPlace.com
Netflix agreed to sell $400 million in stock and convertible notes this week in what some are calling a desperate effort to raise cash and purchase the online rights to more content. The move indicates not just an urgent need to bolster its streaming video catalog but significant cash flow issues for a company that once was seen as the biggest growth story on Wall Street.
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That’s a dangerous trend. Netflix is caught in a Catch-22, where it has to spend mammoth amounts of cash to purchase streaming video rights but has trouble bringing in revenue as subscribers get frustrated with its stale video catalog.
Consider the double whammy of the Starz deal, which will end Feb. 28. Netflix is about to lose 7% of its online movie catalog as the streaming video deal ends, but the alternative was to mortgage the entire company to keep the agreement afloat. Netflix reportedly offered $300 million, but that wasn’t enough to make Starz happy.
Netflix now has created an alliance with Technology Crossover Ventures, which will purchase $200 million in convertible bonds -- debt that eventually will become NFLX stock -- and T. Rowe Price (TROW) and its family of mutual funds will buy $200 million in stock.
The move is clearly meant to avoid the squeeze of a Starz deal again. With the debt, Netflix can afford to make a big-ticket content partnership.
However, this is not a reason for consumers or investors to be cheerful. An analyst with Wedbush Securities told Bloomberg this morning, "It's essentially saying, 'We expect to continue to have cash-flow problems for a long time.' It's a bad deal for shareholders and it looks desperate.”
In short, Netflix is going to have to keep taking on big obligations like this to get more content. If it doesn’t, it will lose subscribers as its content becomes less engaging and less current.
This would be bad enough, but NFLX stock still is reeling under the hubris of CEO Reed Hastings and his heavy-handed plan to split Netflix into two separate companies. What’s more, a small price increase -- meant to fund streaming video deals in the same way as this recent debt -- angered many customers and resulted in an exodus of 800,000 Netflix subscribers. Shares are off 60% this year and down more than 75% from peak valuations over $300 this summer.
There are some who are hopeful for Netflix still. There is a lot of growth potential abroad for Netflix, and there is currency in the fact that NFLX was the "first mover" into streaming video.
However, as Hulu is considering an IPO and Amazon (AMZN) pushes hardcore into the streaming space, it might only get more difficult for Netflix to connect with both content providers and consumers alike.
Jeff Reeves is the editor of InvestorPlace.com. Write him at firstname.lastname@example.org, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the aforementioned stocks.
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"..small price change?..."
netflix halved the service if you kept the same price, doubled it if you kept all service. Where do the limits of a small price change end? It is no surprise the exodus happened. More missteps are likely since the leadership has not changed, and missteps in a minefield of your own making are dangerous indeed, imo.
I'm going back to DVD's. & if they don't come up with something quick on streaming, I'll bail completely. I had no idea it was going to be such a poor selection once I started streaming!
This increase always gets passed onto the customers. Redbox and Blockbuster has raised their prices also. The satellite companies are constantly raising the price of subscription due to the fact that the content providers are requesting higher service payments.
It almost never fails during a holiday or busy television viewing season the cable or satellite providers are going to "drop" certain channels if an agreement isn't reached. This cost too is passed to you the consumers.
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