Can Netflix Bounce Back?

Company loses more subscribers, lowers Q4 guidance

If Netflix were a movie, you’d find it under the Horror section—for the moment, at least.

After the company told shareholders Monday afternoon that it lost more than 800,000 subscribers in the third quarter and expected lower fourth-quarter revenue and profits, shares in Netflix plummeted 27 percent in after hours to about $87.42—quite a drop, especially considering that the stock reached a peak of just under $300 in July.

The dismal quarterly report is just the latest in a growing list of disappointments from a company that was once a media and market darling. First, there was the July announcement that Netflix would jack up prices for subscribers who wanted DVDs and streaming. Then, after customers responded en masse with cancelations, the company announced a separate service called Qwikster that would rent DVDs, but with the same controversial price hike. After even more complaints, the company axed the Qwikster idea.

On a call with investors Monday, CEO Reed Hastings said that splitting video streaming and DVD rentals made sense "in theory" because they represented different brand propositions and audiences, but he admitted that "in hindsight, it is hard to justify."

"Qwikster became a symbol of Netflix not listening," he said.

In the letter to shareholders and on the call, Hastings acknowledged that the company needs to rebuild goodwill among customers and investors.

“The focus for us is in building back our reputation and brand strength,” he said. 

Netflix said revenue increased 49 percent year over year to $822 million, which beat analysts’ expectations of $811 million. It also reported earnings per share of $1.16, above analysts’ prediction of $.96. Despite the better-than-expected earnings, Wall Street focused on the company's bleaker long-term picture.

Facing high costs of entry in the U.K. and Ireland, Netflix said it expected to be unprofitable for the first few quarters of 2012.

“We expect the costs of our entry into the U.K. and Ireland will push us to unprofitable on a global basis; that is domestic profits will not be large enough to both cover international investments and pay for global G&A [general & administrative] and Technology & Development,” the company said in its shareholders letter.

Also, although Hastings said the company has seen no effect from rivals in video streaming, like Amazon Prime and Dish, competition in the space is heating up.

While Netflix was a powerhouse when it was a business built on renting cheap DVDs, it's by no means assured of success as it transitions to a video streaming company reliant on more expensive licensing deals. Netflix’s unpopular price hike might have triggered the initial stock price decline, but industry observers say its problems run much deeper.

“Netflix's functional utility is rapidly diminishing; this is not just a matter of price,” said Adam Hanft, CEO of marketing firm Hanft Projects.” The power of device manufacturers—Barnes & Noble, Amazon, and Apple—represents such a powerful gravitational force that Netflix is becoming more irrelevancy than intermediary.”


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