Netflix's worst nightmare comes true

Amazon has signed a content deal significant enough to challenge Netflix for subscribers. And that's not even the worst of it.

By TheStreet Staff Sep 11, 2012 9:32AM

image100 CorbisBy Richard Saintvilus 

 

I'm now midway through watching the second season of "The Office." In two days, I've been able to watch almost two years of shows.TheStreet.com

 

This would not have been possible had it not been for streaming movie giant Netflix (NFLX). The ease with which the service makes television shows that were old new again is certainly Netflix's best quality to the consumer.

 

For investors, however, the question is how much worse things can get.

 

Retail and tech giant Amazon (AMZN) has just signed a content deal significant enough to challenge Netflix for subscribers. Yet that's not even the worst of it.

 

The deal, announced last week, is with premium TV joint venture Epix, bringing content to Amazon's Prime Instant Video streaming service. Though the terms of the deal were not disclosed, it is said the partnership will bring popular hit movie titles such as "Hunger Games," "Thor" and "Iron Man 2" to Amazon's streaming offerings.

 

What this means is exactly what many Netflix investors had feared would have occurred -- no more exclusivity.

 

What was once originally a five-year deal, of which two were exclusive, has lapsed. Now enters Amazon.

 

But what is Netflix thinking? This continues the streak of yet another misstep for the struggling movie giant, which has seen its stock price erode during the course of the year. Several weeks ago, as the stock traded just above $80 per share, I asked whether the company can stay afloat and survive the unrelenting assaults from Amazon, cable giant Time Warner (TWX) and Coinstar (CSTR) (Redbox).

 

While it may have been able to avoid death by those three, the story changes when one considers Apple (AAPL) and Google (GOOG) have TV and potentially movie plans of their own. What are the odds that Netflix will survive a living room revolution unlike anything the market as ever seen?

 

I still maintain that a takeover is its best option. Outside of that, there is no chance Netflix will survive.

 

By having allowed Amazon to forge a deal with Epix, does Netflix truly appreciate the dire situation it's in? It is as if it no longer values its streaming content -- the same reason it opted to ignore its once-popular DVD model. Now it does not appear to want to protect that decision.

 

Even worse, during its second-quarter earnings report, Netflix said that although it expects to remain profitable in the third quarter, it is forecasting a loss for the fourth quarter due to international market expansion.

 

So essentially, the company has, for all intents and purposes, killed off its DVD business, allowing Amazon to chip away at its streaming division by losing exclusivity, but somehow thinks international expansion in Latin America and continental Europe is worth a fourth-quarter loss.

 

It would stand to reason that a change in focus would be the wise decision until Europe gets its act together. At least that would be the option for a smart management team. However, no one has ever accused Netflix of having one.

 

I would stay away from the shares until things get more clear in terms of the company's strategic direction. Until then, there is only one direction the stock will go and that is down -- affirming that things can indeed get worse.

 

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266Comments
Sep 11, 2012 11:52AM
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Netflix is ideal for what I use it for. It's less than 10 bucks a month and has more than enough good content to keep us occupied. Screw the new movies; most are crap. We get loads of good quality stuff that the average american viewer wouldn't give a chance....The Forsyte Saga was one of the very best productions I've seen anywhere. It's also got loads of full-run vintage TV series....all commercial free and dirt cheap.
Sep 11, 2012 9:56AM
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Amazon needs to update their account services before it can compete.  I can't search for titles on my TV and I can't save titles for later viewing.  That makes the service unusable for me unless I want to watch everything on my computer screen.

They also need to offer all their titles under one price, not this pay-by-title model they have now.  I can get all the current DVDs I want from Netflix for $8.  Can't do that with Amazon.
Sep 11, 2012 12:01PM
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next big thing once netflix is gone will be the amazon pay per view plan....$1.99 per episode of a show...$3.99 per movie... think before you leap net haters
Sep 11, 2012 1:04PM
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I've had Netflix streaming for almost two years, and it's cheap, and I'll never have time to watch everything they offer.  I tried Amazon Prime and it had no selection.  Great place to buy books though.  I think this is all hype.  What do peopole expect for $8 per month?

Sep 20, 2012 9:11AM
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Netflix was an ingenious business plan...and until they got greedy and DOUBLED their fees, they were doing fine...now they are in decline.

Sep 11, 2012 2:12PM
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I love my Netflix...and have NO plans to give it up. Their selection of foreign movies cannot be found ANYWHERE else. Until Netflix...I had no idea their were sooo many high quality foreign movies out there...which I personally find much more entertaining and substantial than American "car crash/blastem" types. Redbox cannot hold a candle to Netflix's selection of high quality foreign movies....frankly I don't believe they even offer any. 
Sep 11, 2012 1:15PM
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I used to use and like Netflix.  Then they split the plans...watching on line everything was old and junk, so I found very little worth watching...had seen all I wanted within the first month and they weren't adding anything.  I prefer new movies, but the disc plan seemed to be getting slower and slower with delivery.  Amazon isn't much better...you can pay 2 for a single episode of some show you could have watched free on TV or you can pay 4 for a movie.  Prime seems to have a little better selection than Netflix in my opinion...but they basically make you sign up for a year at one time....70 some bucks to join...if they went to month to month I migh consider it, but not until then.  I still find Redbox to be the best bet....I get reasonably new movies and they cost less than 2 dollars...and they are everywhere so picking up and taking them back isn't much of a hassle.  Movies studios are trying to kill off Netflix and Redbox...they want something like Amazons 3.99 per movies...and once they kill of the competition, that will go up.  The movies industry is already killings itself with greed...movies cost so much, people only go when there is something really special or interesting they want to see.  People aren't going to pay that kind of money for lesser and smaller movies...and the box office shows that more and more of them are tanking.  I think if Redbox can vend a movie for a little over a buck, then Amazon should be able to allow you to stream one for the same...no boxes or physical discs after all.  If consumers hold firm, we can keep the prices down. 
Sep 11, 2012 12:07PM
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When Netflix "skrewed" it's customers a while back through some pretty dumb corporate decisions, it was, in all actuality, Netflix "skrewing" itself, as it turns out. Vendors can't get away with ripping customers off and insulting them with absolutely ridiculous schemes which try to play them as suckers. Netflix had a good thing going before they stepped in something. What a price this former "winner" is paying for greed and incompetence.
Sep 11, 2012 2:07PM
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I have still yet to understand how so many people view the actions of Netflix last year as 'screwing their customers. Do a little bit of research, people. If you do, you will discover that film companies were the ones doing the 'screwing'. Netflix created a business model that worked and grew beyond belief. It grew to a level that movie studios did not forsee. When the time came, the movie studios wanted a larger and very unreasonable cut. In the end, Netflix had its hands tied and had no choice but to raise prices in order to afford the licensing and contracts. Sadly, Netflix customers spoke out of ignorance and outrage. Since this happened the selection has been less than satisfactory and many studios have pulled their properties. The fault lies in both the hands of Netflix subscribers and the Studios, not Netflix.

I suppose this is just a sign of the ignorance of people in general. Most actually believe that when a company has an operating cost increase, they simply cut their bottom line and obsorb the cost. This is not and has never been the case. Take a basic economics course and you will find that increased operational costs are almost always passed along to the consumer.
Sep 21, 2012 9:16PM
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Hey Netflix lost us when they decided that splitting things up was a good idea!

 

Sep 11, 2012 10:28AM
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I love Netflix. I don't have to make a specific trip to a Redbox to return a dvd; I drop mine in the mail when I leave for work in the morning. I get a nice range of television/movie to stream. I've watched all complete series of Frazier, Roseanne, Coach, The Tudors, That 70s Show and I'm now in the middle of watching the episodes of Doc Martin. (If you haven't seen this, watch it; it's a funny/sad televison show from England about a surgeon who develops a fear of blood and relocates to become a general practitioner in a seaside village inhabited by a slew of quirky residents). Anyway, I can stream these shows through my television; I don't have to sit at my computer. It would be nice if Netflix could partner with a company such as Amazon or Redbox. They'd be a giant!
Sep 11, 2012 2:55PM
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It's 8 bucks a month. I drink more than that in cokes in 3 days. I have had Netflix for several years, and yes I agree they do not have all the latest stuff...but for 8 bucks I can watch a lot of different things when I want to. I don't even own a t.v. and I am not going to pay those ridiculous cable prices. Plus I can watch it anywhere I have my laptop. It may not be for everyone, but I personally think it is one of the best bargains around.

Sep 11, 2012 2:20PM
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Until Amazon is a single charge like Netflix it will never "kill" Netflix.  This crap of paying for a service and then paying to watch movies or tv shows will not fly with the majority of subscribers.   I dumped Huluplus because of the stupid and yet constant commercials.  That's what free (via antenna) tv is is for. I dumped cable because of their outrageous fees, w/ Netflix I may be a season or two behind what is currently on, but I only pay $8 a month to watch WHAT I WANT not what someone else thinks I should at a certain time.  
Sep 26, 2012 8:22PM
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A lot of people seem to be complaining about how Netflix split their services. I didn't mind because I understood. It was only an extra $2 a month (above the cost of instant viewing) to have DVDs sent to my house. I was receiving maybe 5 or 6 DVDs a month. Given that they pay for one day shipping BOTH ways (I don't know how much that is, but a normal stamp that isn't one day is 45 cents so both ways would be 90), pay for the wear and tear of the DVD (I once received a broken one that they would have had to replace), pay for the envelope, and pay for the manpower to send it, it probably cost them close to $1.50 for the service. If I receive 6 DVDs a month then I am costing them $9 (and I actually didn't take into the account the bandwidth on their website and the money that they have to pay to put movies on instant streaming and all the other overhead) yet was paying $10 total? They could not have been making enough money to stay in business. It was too good to be true and so they had to do something about it. I wish that they had a "pay by movie" deal. Then I'd pay for instant streaming and only have something sent to me occasionally instead of paying the additional $8 a month when some months I'm too busy to watch a lot. The mistake that Netflix made was after the split, they sent everyone a contentless email about how some companies grow to do some things better than others and they apologize and blah blah blah. If the CEO would have just said, "Sending DVDs is costing us this much and we're charging this month and so we're losing money" then more people may have understood.
Sep 21, 2012 5:30PM
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In 2000, we bought our first DVD player. Inside, Sony had included a free trial to Netflix. It was a no brainer for us to join --- even though we lived in a major US city, at the time, the video store had only 10 DVDs for rent. (Remember Videos? Be kind, rewind? ) Over the years, Netflix has distinguished itself by providing a good service for a reasonable price. They have committed themselves to developing cutting edge delivery for those of us who want to stream, while maintaining their commitment to those who prefer DVDs -- in the face of increasingly expensive postal costs and shifting agreements with the movie industry (who must pay residuals to actors...get it?) Most of the negative comments made in response to this article are ridiculous -- made by people who want something for nothing. What a great value Netflix is - you can't even buy popcorn and a coke for $8. So, to our friends at Netflix...ignore this stupid article and the comments of these pathetic whiners'. And, please, hurry up and get to Europe. (we live in France now). We are all waiting for you...
Sep 11, 2012 4:33PM
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This seems like an ochestrated effort to knock Netflix out. I have both Amazon and Netflix. Using Amazon is not nearly as good of an experience. Also had Hulu Plus for a bit. On Amazon Prime I run into movie after movie that I can't watch for free on my Prime membership, I have to pay extra. To make it worse I have to pay MORE THAN if I get that movie from Redbox for 1 day. When Amazon, Apple and Google and whoever else are streaming me a movie for a buck then lets talk about Netflix dying. As it is when a movie on my Apple TV or in iTunes costs $4-5 depending on if you get "HD" or not and on all the other services as well the pricing pretty much the same I'm not really interested in reading PROPAGANDA about Netflix going the way of the dinosaur.
Sep 11, 2012 10:29AM
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'Besides needing new movies, I don't see anything wrong with Netflix is has far better movies than those game shows on TV.

Sep 11, 2012 3:00PM
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I can't understand people who say they can never find any good movies to watch on Netflix.  My husband and I find something wonderful every time we stream from our Roku box; in fact, we often have a hard time making a decision as they all look so good.  My husband watches 1 or 2 movies a day and has yet to be disappointed.  We discovered Downton Abbey this way.  They have an excellent selection of independent movies that we otherwise would not have seen.  Personally, I don't find the "smash-'em-up violent" movies all that enticing and we're not sci-fi fans. To each their own.  As for first-run movies - well, we can wait until they come out on DVD; there's plenty to choose from before then.  We love Netflix and hope it's around for a very long time. 
Sep 21, 2012 11:50PM
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Wal-Mart is the giant that slew local family owned grocdry stores. Now Amazon threatens to do the same to Wal-Mart, Target, et al. So, Wal Mart, how does it feel to be the roasting weenie, and not the one doing the roasting? Hmmmmm?
Sep 25, 2012 8:11PM
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I wish Netflix was half as good as it used to be, but honestly their streaming selection has gone down the toilet.  I remember back when they used to have new movies commonly on streaming, and even older GOOD movies.  Now when I browse Netflix, half the movies I've never heard of, or they're awful made-for-TV films, or movies that no one wants to watch anyway.  Many of the TV series that I wanted to watch are gone, and they have an awful habit of removing items that become 'popular'.

If Amazon releases a streaming service of the quality this article suggests, I will drop Netflix faster than a hot potato and jump on Amazon.  Netflix also shot themselves in the foot when they decided to charge extra for DVD delivery (which is where most of the good titles are).  No thanks.

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