Netflix: Missteps behind, opportunity ahead
Customers found the DVD rental company wasn't indispensable when it raised its prices.
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.
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 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.
See our complete analysis for Netflix
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.
@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.
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.
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.
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.
50% upside in 2012, then facebook buys them out for web2.0 grwth
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.
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.
MORE ON MSN MONEY
Copyright © 2013 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
The Fed may start tapering in just a few months. Here are a few of the likely winners and losers.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.