Netflix: Missteps behind, opportunity ahead

Customers found the DVD rental company wasn't indispensable when it raised its prices.

By Trefis Jan 4, 2012 1:41PM
Image: Hollywood (© Comstock/SuperStock)While 2010 saw Netflix (NFLX) transformed from a mainstream DVD rental provider to an online movie-streaming leader, 2011 was a mixed bag.

After the exceptional subscriber growth in the first half of the year, which propelled the company's stock to almost $300, terrible management decisions led to a momentous slide and tarnished its image. This has opened up a window of opportunity to newcomers like Amazon (AMZN) and Dish Network's (DISH) Blockbuster.

Our current price estimate of $126 for Netflix implies a premium of about 75% to the market price and is hinged on our expectation that Netflix will recover from this temporary slump. However, 2011 showcased the company's delicate relationship with its customers, which will need to be nurtured even more now.

Netflix's expensive arrogance

Beginning 2011, Netflix seemed unstoppable and the accelerating subscriber additions demonstrated high customer demand for its services. The company misunderstood the reason behind its success and daftly hit customers with a sudden 60% price increase for dual-service subscribers (DVD+streaming) without explaining the rationale behind this decision. Netflix did not have content that would make it indispensable, and instead, customers were partly sticking around due to its low subscription price.

The decision not only put the brakes on expansion but led to subscriber losses for the first time in many years. The situation was exacerbated after Netflix's announced rebranding of its DVD business to Qwikster. Netflix later reversed this decision. The subscriber backlash and resulting smaller customer base sent the stock price plummeting. We note that the subscriber losses were primarily concentrated among DVD customers.

Netflix US DVD Subscribers


From being a collator of older content, Netflix began its transformation in 2011 as one of the service providers for first-run TV content. The company acquired series such as "House of Cards" and "Lilyhammer," and is now working with a director on the production of 13 episodes of a horror series, "Hemlock Grove." While this is just the beginning of a transformation, Netflix will face severe competition from traditional pay-TV service providers. This will lead to higher content costs as we have already forecast.

Netflix Content Acquisition Cost as percent of Revenues

International expansion

Netflix began its international expansion in 2010 by entering Canada, and the pace accelerated in 2011 with a foray into Latin American markets. The company also announced  the U.K. and Ireland as its next destinations.

Nevertheless, doubts surround the prospects for success in Latin America and the U.K. The former has obstacles in the form of low per-capita income, lack of credit card usage and low broadband penetration. While the latter has strong local competition from broadcasters and Amazon's Lovefilm. However, over a period of seven to eight years, we expect Netflix to gain a significant subscriber base in international markets.

Netflix International Streaming SubscribersSee our complete analysis for Netflix
Jan 4, 2012 4:24PM
Jan 4, 2012 9:00PM
I signed up for streaming and it is around 8 bucks a month......8 bucks people, A movie ticket cost more and you only get to watch the picture once. With Netflix you can watch the movie or TV show 10,20,30,40 or more times and all you pay is the 8 bucks. Picture quality is long as the original film quality is good. Not everything is or was filmed in digital people. as far as the selection, OK there are a couple of issues like putting cartoons in with sci-fi or thrillers.....If it is an adult style cartoon, example-resident evil, then please put it where it needs to be. The backyardigans do not need to be in dramas or in family movies, it needs to be in children or a separate cartoon section. Complaining about the older movies people???? Instead of bitching about it try watching one or two you will find real acting talent and props, no CG. This is a good service and worth the 8 bucks.
Jan 4, 2012 7:22PM
Netflix is still the best for the money. It offers thousands of movies plus you get New release DVDs, and can watch many TV show seasons. Some people like the selection of old movies, and the option to control what is on their own television. I think they should offer bundles to increase revenue. Like many other utilities do. Verizon , Sprint, or AT&T would join with them I am sure. Cable, Dish, and DirecTV are all way over priced and just keep getting more and more expensive. Then they hook you with long term commitments or hidden charges. Anybody that has had Satellite television knows the shock of a regular bill once the $29.99 intro monthly price ends. It is usually well over $100.00 a month. Blockbuster does have a similiar service as Netflix, but you have to watch it on your computer or your TV has to be internet capable. Amazon offers a streaming service, but it doesnt seem to be very user friendly. I will be headed back to Netflix for sure.
Jan 5, 2012 3:55AM
My name says it all.  I was a loyal customer for about 7 - 8 years.  Happy with the service and no late fees.  The first price increase (with no notice) was explained away with the, '...have to pay more for more content... newer releases... etc..."  Then a mere 2 months later the price doubled, not from the original cost - from the new higher cost.  Yes, I did get advance notice of when the new price would go into effect - and the day before it did - I cancelled my service.  Yes, I was one of the high end consumers, but felt like all the company was interested in was finding out what my price break point was.  It was the first increase.  I've never rooted for a company to fail, but I'm not rooting for this one to succeed.  Won't go back - ever.  Not ever - even if it was free.  I vote with my dollars, and I'm spending them elsewhere.  Now Netflix - try taking that to the bank.
Jan 5, 2012 10:54AM
Good luck finding the wealth of hard-to-find back catalog titles and foreign films anywhere but Netflix. If you're looking for nothing but new releases, then there are lots of options for you, but if you have interest in movies that were made before 2000, as I do, then you're not going to find a better option than netflix. 

Besides, when I do want a new release, I want it on Blu-Ray and Blockbuster and Redbox kiosks charge about 4x as much for Blu Ray at their stops. Not to mention, it's cold out and I don't like waiting behind people to make their decisions. And thanks to the exodus of DVD/Blu Ray customers on Netflix, the "very long waits" (which I experienced a ton of myself) have become far less common. Bottom line, Netflix has the absolute best selection of titles around (the 30 days waits on new releases are annoying, but to me, not a big deal. I can wait) and that's what's most important to me as a customer. Selection and options. 

I'd rather my movies come to me than wait in line outside, or at the grocery store (and have to bring it back too). I use AppleTV and Amazon as well occasionally, but for my tastes, Netflix is the best service around.... and Blockbuster Online costs the same. I don't know how they get off advertising their prices are better. I can swing the extra $4 a month they started charging me. In fact, if $4 a month is that big a deal to some people, then movie rentals shouldn't be your primary concern. 
Jan 4, 2012 11:11PM

@vinegaroon your satelitte and cable provider pay big bucks to the movie studios in order to have a movie be available for pay per view at the same time it is released on DVD. They need to recoup for the cost of the film rights and still make a profit, why the $3.99 fee.  Plus they have to follow whatever agreements the studios allow. Alot of people seem to think that Netflix, Amazon, and Blockbuster control what gets streamed, they don't. As was explained in the article, movie studios have finally realized how much money was lost over the past few years to streaming and are jacking the price of digital rights up.


My experience has shown that in the end whatever way you choose to go, Netflix, Amazon, or Blockbuster you are going to pay about the same. Any new title will still be around $3 - $4 to rent. I myself stream Netflix on XBOX Live and if I want to rent new I stream my rental thru their Zune service. Otherwise I just wait 3 more months for it to show up on the movie channels. I just wish you could subscribe to HBOGO and Showtime without needing cable or satillite, then I would just add Hulu Plus and dump Dish Network. Hint, Hint.

Jan 4, 2012 5:40PM
For once the voices of the customers was heard loud and clear, netflix was not satisified with multimillion dollar profits and got greedy and wanted more.  Now they could go clean out of business.  I have no desire to pay for old movies I've seen a lot of times and won't watch again, or those made for whatever films that usually are terrible.  What is it with these pay for view and companies like netflix, even TV cable and satelite dishes.   We can only watch one channel at a time, per TV, so why do we have to pay extra money to watch a movie.   The price of the movie should be in the price of the service, when we watch a movie, we aren't watching another program, it would not cost your company any more to have one price for everything instead of making us pay for every service you provide, we still watch only one channel per TV. 
Jan 5, 2012 12:38PM

Netflix has no ability to compete against Apple, Google, and Amazon. You have to buy content to stream. Netflix dosent have the money on the books to buy a fraction of content compared to the big guys. Look at their margin. They make 200 million on 1.2 billion revenue. They could do that for 50 years and not have the financial clout that Google and Apple have today.


Bottom line. Netflix will be bought buy one of the above, probably Amazon at a discount, or it will die.

Jan 5, 2012 12:54PM
things change, get over it....personally  i stream Netflix and when I do want a new release there is always family video or redbox....can even reserve redbox online....Netflix is still cheaper to stream than their competitors
Jan 5, 2012 9:46AM
I used to be a Netflix customer but I preferred Blu-Ray. Almost always there was a long wait, so I would go to the Redbox and get it the day I wanted. I choose Redbox.
Jan 5, 2012 2:50PM

I killed off DVD rental from my Netflix too. But I have to say Neflix would be better to spend money on more recent streaming content then waste money creating its own first run series.

That to me is just wasteful. I'm waiting to see what happens in February when Starz contract expires with Netflix. For the last month or so I have been using Hulu more and more for TV shows. Not sure why Netflix cannot update their content faster. But I think 2012 is not going to be any better for Netflix. Not unless someone buys them out.

Jan 5, 2012 2:38PM
I use to get both DVD's and streaming from Netflix. I killed the DVD part about a year ago mostly due to the fact that Netflix cant rent new releases for a month after they come out, which blows. I went back to Blockbuster for DVD's. I do the mailings/store exchanges which I like. Its not totally cheap per se(21.00 for 3 at a time), but I like to get movies when their available. Its still WAY cheaper than going to the theater!! If i take my whole family to the theater, the cost for a matinee is about $50. Thats just for one movie. I average about 10 rentals a month using Blockbuster, so for $21 I can see about 8-10 new releases. That would cost $500 if I went to the theater..not that any sane per would do that. With Netflix it was taking longer and longer to get the movies I wanted too. Blurays took even longer. Then next, a few weeks ago I cancelled the Netflix streaming. The content available was getting old. They rarely add new stuff, and to make matters worse...starting March 1st you can kiss STARZ goodbye. What left besides old TV shows and old movies?? Whoppie. For people like me that like new movies...forget Netflix. I'm waiting for Amazon streaming content to get better...then I'll switch completely to them.
Jan 4, 2012 6:27PM
my problem with them was the first price increase and than being forced to pay for streaming..which I rarely do, for me the streaming was not at all satisfactory, very poor picture  quality control, lack of selections has had been stated ad nauseum plus connection problems not to mention ff or rewinding movies was a pain..  the recent move to go back to just dvd for a lower price works for me
Jan 4, 2012 8:09PM
I have been a Netflix customer for years now. When they announced the increased fee, they gave me an option to use DVD and/or Streaming. I went with DVD. I use streaming through other means. I'm happy and I'm actually saving money by not streaming with Netflix. I appreciate the notification they sent me concerning the increase and did not hold it against them. I have always received excellent service from Netflix and will continue on with them.

As for amazon and especially blockbuster, I will never engage in business with them again. I used to be a blockbuster member from when they opened their first stores; before streaming and rentals by mail were introduced. BB charged you to death with late fees (more than the price you initially paid for the rental). They never listened to our complaints about the exuberant fees and they got what they deserved. They also tried many times to charge my account $75-$100 for rentals they claimed were never returned. Too bad they checked their store video cameras and found out they were wrong. I'm glad BB failed and hope for their complete shutdown.

Amazon's service can be better and they need to stop allowing all of those dirt bag online stores to sell under their web site.

Netflix will be around for a long time. Too bad there are so many out there who are so perfect that they won't allow one mistake before moving on to what they think is a better choice.

The rush to make the decision to leave Netflix goes to show how folks react without thinking things through. I bet most of them live on the east coast too--ignorant and always think they're right.

Jan 5, 2012 11:02AM
Why do people waste their time and money on this stuff, when they can get a lot of this off the internet for free. You pay big bucks for cable, internet, etc. You might as well get your moneys worth.
Jan 4, 2012 5:04PM

50% upside in 2012, then facebook buys them out for web2.0 grwth

Jan 4, 2012 5:53PM


Agreed.  I too cannot believe how people flipped.  You were getting more than great service at $10 a month for both streaming and new dvd rentals.  For me I never once rented a dvd as I only streamed and now save money using only the streaming service.  People also complaining that they only have old movies, blah blah.  If you want all the new movies streamed pay the $19.95 for a blockbuster streaming service and quite whining, but from the looks of it since Netflix went to the same price that is apparently too much.

Jan 4, 2012 5:33PM

i can't believe that people are still  flipping out over this. it's not like you watch 2 movies at once. i'm glad they made the change. i only watch dvd's and wondered why they didn't offer just "dvd" seperate? everyone better start getting use to "changes". if companies can find

ways to make more monies they will.  i've seen in the past ten years alot of products that

said  "all included" but now you must purchase the same items seperate. 


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