Thursday, September 15, 2011

Netflix Crushed After Cutting Subscriber Guidance (NFLX)

ZH:"Netflix Plunges After Subscriber Guidance Cut".

Barron's:"...the world is moving to streaming and dumping discs, as evidenced from the big cut in Netflix’s DVD subscriber forecast. That makes outfits like Starz, which control distribution, more powerful..."

Yes! Here's the fundamental problem with Netflix: they were able to use the first sale doctrine to snooker Hollywood and build an impressive DVD rental business. Everyone assumed that this would translate into a profitable streaming business, as though a streaming business was just a question of "brand" or "mindshare". In my review of Hollywood Economics, I diagnosed the problem with Netflix:

[E]pstein has also written about the problems with the Netflix (NFLX) business model,
"Netflix can buy 10,000 copies of a major title for $150,000 to mail out, [but] it will need to spend about $16 million to license it for streaming. Such a 100 fold increase in price can obviously be deleterious to profits especially since Netflix still has to maintain its mailing centers, and buy DVDs, for the subscribers who elect to continuing using the mail-in service..."
He hit the nail on the head. The problem with Netflix is a problem of competitive position. There are several streaming movie competitors, and they all need to offer their customers the back catalog of streaming movies that people want to see. That means that they bid against each other; the content owners can play them off each other.

The rents from the streaming entertainment business are going to go to the content owners. And it is clear that Netflix does not understand this. Earlier this year, when the stock was at $300 (it's down 40%!), the company had a market capitalization of over $15 billion. The smart play would have been to sell stock and acquire content, either by buying libraries or by generating new content. 

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