Good News and Bad News for Netflix Shareholders
Despite earnings that were much stronger than those turned in a year ago and a 62% surge in subscriber growth, Netflix stock floated like a cannonball last night, as it dropped 20% during after-hours trading.
The problem: lower revenue due to the fact that more and more subscribers are signing-up for cheaper plans. It has also cost Netflix more on average to bring in new subscribers. In years past, Netflix spent about $38 for each new subscriber; in the last quarter, that number skyrocketed to nearly $44.
This is the result not only of price-cuts, but also of increased aggressiveness in terms of advertising expenditures, both of which are the result of heavy competition. Blockbuster’s adoption of a Netflix-esque rental model is the main reason behind the price drop, but Blockbuster is far from being Netflix’s main concern. The widespread adoption of video-on-demand by digital cable poses a much biggers threat to Netflix’s continual growth, as do online providers like CinemaNow and Movielink, who just announced that they will be allowing users to download movies that can be burned onto DVDs.
Here’s a prediction: CinemaNow and Movielink will not even come close to touching Netflix, at least not in the near future. Their movie download models take too long (thereby eliminating its convenience advantage) and are way too expensive (the movies cost about the same as they would from a retail store). The only way this model gains any substantial ground upon Netflix is if Apple (i.e. somebody who knows both what they are doing and how to market it) takes it on and improves the technology.
Video-on-demand from cable television providers, however, is currently a real problem for Netflix. Fortunately for Netflix it will always have the advantage of having a limitless library of DVD titles, too many to feed to a cable box hard-drive—but not too many to store on the internet. Once the downloading model is able to adapt the conveniences of the cable on-demand model, look out. I predict, however, that this will take some serious time.
Another possibility, however, is that Netflix itself gets in on developing better movie downloading technology.