As I am writing this, it's approximately 9:30 am on America's west coast, 12:30 pm on America's east coast and 1:30 am in Tokyo, Japan ... and the Netflix stock price has fallen $41.35 to $77.53, which is the price it was at in early 2010. That is a one day loss of 35%. 35%!!! Are you kidding me?! But you want to know what's even scarier - Netflix stock has fallen 72% over the course of the past three months.
Holy Crap!!!
Some of that has to do with some inside baseball, analysts of all stripes downgraded their projections for Netflix futures rather severely today. But, let's be honest, these guys didn't just downgrade their projections for the hell of it. The company lost 800,000 subscribers in the third quarter, that's over 250,000 more than they projected. But, what does seem to be counterintuitive, and worth noting, is the company has made about 1.8x as much as they did the previous year at this time, while revenue has increased 49%. But, honestly, analysts see the writing on the wall. These short term gains are nice, but long term. Netflix business model is deemed "DOA."
So what is Netflix doing to stem the tide? Apart from tearing itself apart with now infamous price increases and announcements of company splits (DVD and Streaming Services) that are only then retracted days later - namely the ill fated, poorly named, poorly conceived and shockingly ill advised Qwikster announcement.
Well it's going international of course. HA! Please. Sorry guys, the DVD market isn't all that different in Europe and Asia and competition has already established their ground.
MY TAKE: Here's the long and the short of it.
Reed Hastings, CEO of Netflix, is no fool. He's not a blubbering idiot, as the media has been so quick to deem him. Reed Hastings knows he's on a sinking ship. He actually knew it before the rest of us. And hence the attempts to save it.
He has tried price increases (which have as of now seemed to increase revenue at the expense of customer base). Why the increases in subscription prices? Some of which were unheard of 60% increases? Because they worked. See increases in earnings and revenue as discussed above.
But. The costs for content are also rising, and will rise sharply in the near future, as more of the content providers (studios, networks and other similar distribution companies) want a bigger chunk of what was a very profitable pie. The executives at these companies feel, and not necessarily unfairly so, that Netflix was built on their backs as they provided content via licensing agreements that were very lopsided because no one knew if Netflix was going to work when they were negotiated. And many of those licensing agreements are up for renewal and renegotiation. Starz, for example, a content provider for much of the "oscar caliber" films on the streaming service is already planning to be dumped by Netflix because of an inability to agree on price structures.
Starz content, btw, is most of what I watch when I stream a film off of Netflix. They may be adding another name to the list of 800,000.
So Reed Hastings knew he had to act. And he did something rather novel and creative. And he did what you want your CEO to do in these situations, he took an informed gamble. He decided splitting the company into two distinct services, streaming and DVD, would be the best way to save the Netflix brand. Then they could sell off one of the services and focus on the other. Some have speculated it was going to be the streaming to Amazon, others speculated DVD because it is no longer a viable business model. Now it's neither becuase of the massive backlash that ensued. Hastings gambled. And he lost. It happens.
Oh wait? What was that? DVD is dead? Yeah. You read that correctly. DVD is no longer a viable business model. Not DVD by mail. DVD. In fact, Reed Hastings himself has said "DVD will one day soon be like AOL dial up."
Streaming is the future. And Blu Ray is the now (and for Netflix to completely reinvest itself in Blu-Ray would be a gargantuan undertaking at this point. Almost too much. But it may be what they have to do in the end). But for a business that has created an empire around what is very soon going to be an outdated and outmoded technology, the future does look grim.
And the captain has tried every maneuver in his arsenal to avoid that iceberg, right ahead. But when the seagulls fly away and leave you all alone in the open sea, much like a 70% drop in your stock price, you know the end is nye. Time to man the life boats.
UPDATE (11:15 am): CNBC Video on Netflix, its competition and its future. They think people will come back eventually. I still have my doubts (pay special attention to Amazon's new streaming service and how it will impact Netflix's market share).
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