Netflix Takes More Punishment
Jul 26, 2012 7:00 AM PT
Wall Street took Netflix at its word, and then some, when the company said in its earnings report that it probably would sign up fewer new subscribers this year than it had expected.
That, coupled with a 91 percent year-over-year drop in net income, caused shares of the company to promptly drop by 25 percent by late afternoon on Wednesday. Meanwhile, four brokerages cut their price targets for the stock.
Netflix reported a net income of US$6.16 million, or 11 cents per share, for its second quarter results. For the same period last year, it posted $68 million, or $1.26 per share. The company attributed the loss to its expansion into the United Kingdom.
The market also seized on Netflix's lackluster projections for growth for the rest of the year.
The damning statement in the letter to the shareholders read: "Our Q3 guidance is 1 million to 1.8 million domestic net adds. If we finish Q3 in the high end of that range, we would remain on track for 7 million domestic net additions for the year; otherwise it would be challenging to achieve that goal by year end."
There are reasons why it might not, Netflix went on to explain, including the fact that the Olympics will keep people glued to network television.
There were other statements not to like in its report: While Netflix expects to be profitable again in Q3, it will make its next international market foray in Q4, "which will drive us temporarily back into the red."
Last Year's Disaster
The earnings report also made references to 2011 being an anomaly year -- a nod to the company's disastrous price hikes.
The company never really recovered from that gross misstep, independent tech analyst Jeff Kagan told the E-Commerce Times.
"Last year, they essentially betrayed their customers, and that backfired on them. Netflix was an innovative company at its start, but it since has gotten a lot of competition," Kagan said.
It is becoming a less important player, he added -- and it doesn't seem to realize that.
At the same time, there is hope for the company, largely because more and more consumers are cutting the cord with their cable providers to stream movies and TV shows online. Netflix, clearly, is a player in that regard.
"But will they figure out the right mix of pricing and services to stay competitive?" Kagan wondered. "I really couldn't tell you."
One step the company needs to take is to scale back its grand aspirations of becoming a global streaming video provider, Michael Pachter managing director of equity research at Wedbush Securities, told the E-Commerce Times. Besides the UK, the company has also expanded into Canada and Latin America.
"They must give up on their international strategy and price their domestic offering correctly," Pachter said. Right now, he added, at $8 per subscription, they are not making enough revenue.
Back to Their Roots
What Netflix needs to do is go back to its roots, offered Matthew Knysz, cofounder and CTO of LiveLead.
It was one of the original leaders in terms of streaming legitimate content, which turned out to be so much better than waiting for movies to arrive by mail, he told the E-Commerce Times.
Netflix needs to expand on this revolutionary technique it pioneered, he said.
"First and foremost, they need to increase their streaming library; this should be their new primary focus -- not DVDs, which are quickly becoming an outdated medium," said Knysz.
Second, Netflix needs to update its pricing model to reflect its customers' use cases, he said.
"While Netflix has many different pricing models for how many DVDs one can rent at a time, they have only a single pricing model for streaming content, Knysz noted.
"The streaming is unlimited, he explained, but only two different devices can stream content simultaneously from a single account. With family members wishing to watch several different things in different rooms and on different devices, this model requires multiple accounts per household, with no price break."
Furthermore, people can do the math: To have two DVDs out at a time does not cost twice as much as having a single DVD out at a time, he said. "Certainly, streaming, the future primary medium of Netflix, should not be hindered in this way either."