Netflix's big collapse: Do you believe in streaming, international expansion?

Netflix's big collapse: Do you believe in streaming, international expansion?

Summary: In the long run, Netflix's focus on streaming and international expansion makes sense. Today, those decisions are causing a world of hurt.

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Netflix shares are in free-fall following a rocky third quarter, customer service mishaps and projections for early 2012 losses as it ramps up an international expansion. At some point though, Netflix will look like a bargain as long as you believe in the case for streaming media and international expansion.

Shares of Netflix were down more than 35 percent in early trading. The big issue is that the company projected a first quarter loss in the first quarter as it launches its U.K. and Ireland streaming service. Netflix will hold back on further international expansion until it returns to profitability.

Needless to say, Wall Street analysts were downgrading Netflix and hopping off the bandwagon like rats on a ship. Add it up and Netflix has gone from darling to dog in just a few months. The consensus appears to be that Netflix moved too quickly to streaming and hurt its reputation and customer base with a series of botched moves. In other words, CEO Reed Hastings went for creative destruction and only got the destruction part.

More: CNET: Even as shares plummet, Netflix a worthwhile buy, analyst says | Netflix's latest show: When creative destruction attacks | Netflix's debacle continues: Fourth quarter outlook horrid

The larger question here is whether Netflix will be a bargain at some point---even a screaming buy. The five-year chart shows little support until $50 so things could get worse. But the long-term story of Netflix's move to streaming service and international markets makes sense. Navigating the shift could be tricky. Hastings likened the DVD business to AOL's dial-up service---a good business that will decline over time.

On the third quarter conference call with analysts Hastings said:

It will probably be something like AOL dial-up from 2002 to today, where it's a steady decline every year of a little bit, but there is a long-term residual market. And there's very little fixed cost in the business. So that's not a material cut off of its efficiency, it's almost all variable cost. The postage, the labor, all of those aspects.

Analysts were mixed on Netflix. In the long run, Netflix's moves make sense. Today, those moves are causing a lot of pain. The reality is that no one knows where Netflix is headed---even company management. Here are three scenarios to ponder:

The best case: Michael Olson, an analyst at Piper Jaffray, said:

We believe Netflix continues to be the service best positioned to leverage the global video streaming opportunity. The company moved too fast towards streaming and now must win back investor confidence; we do not expect that will happen overnight, but over the next few quarters investor optimism will shift more positive following this reset of the business.

The base case: Netflix weathers a few rocky quarters, but ultimately makes the transition to streaming. Customers give Netflix a chance and defections stop. Netflix is bruised for a year or two, but then recovers to an increasingly competitive landscape. Oppenheimer analyst Jason Helfstein said:

Netflix's worse than expected 4Q guidance should mark the end of this ugly episode. Investors will likely remain scarred near-term.

The worst case: Netflix will see more defections as its Starz partnership ends. Morgan Stanley analyst Scott Devitt said in a research note that Netflix faces a rocky future. Devitt's choice quotes:

We thought Netflix had overcome its moment of miscommunication and was ready to repair the damage to reputation. We took the wrong side of the trade. After learning of Netflix’s decision to initiate an investment cycle into the UK and Ireland at a time when its domestic business is reeling from subscriber losses and content cost pressures, we decided to close our Research Tactical Idea.

And.

Despite management’s analysis of time spent watching serialized TV content vs. Starz content, we believe subscribers are largely unaware that their Starz content will cease to exist after February 2012.

And.

Despite management’s analysis of content and subscriber habits, the bottom line is that Netflix will pay more for content tomorrow than it is paying today because there are other, credible buyers in the market for that content. Amazon’s acquisition of content has a collateral damage effect on Netflix.

Ouch.

Related: Netflix’s Qwikster retreat makes sense, but looks skittish

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15 comments
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  • RE: Netflix's big collapse: Do you believe in streaming, international expansion?

    What are you waiting for Google? :p
    Lghost
    • Don't expect anything from Google

      @Lghost Google is not a "team player". They would never pay any licensing fee to the producers. Therefor they will never build an ecosystem that could replace or compete with Netfix.

      If they can't steal it, they won't even try.
      wackoae
  • Believe in streaming, could care less about International Expansion

    I love the idea of streaming media. I want all the stuff I used to get, and still could get on DVD to be available through a streaming service for a flat rate. Right now no such service exists. I want NetFlix to expand its content but could care less about expanding into other markets. If the content sucks, then expanding into new markets just sucks even more.
    cornpie
  • Netflix is dead.

    It never had a chance against the big boys with deep pockets like Amazon, Apple, whoever is funding Hulu.com.
    MSFTWorshipper
    • RE: Netflix's big collapse: Do you believe in streaming, international expansion?

      @MSFTWorshipper

      Yes it did, they committed suicide.
      neil.postlethwaite
  • RE: Netflix's big collapse: Do you believe in streaming, international expansion?

    I love streaming however netflix is streaming OLD content and I've given them 4 chances over the last few years. Waiting 2 months for a current release on dvd sucks but not getting it streaming for a year or so makes it just not a service I will pay for. Then take into consideration their lack of any customer service it is a NO GO as far as I'm concerned! I sure hope someone steps up and starts to stream current content when released on dvd and I'll be there in a heartbeat!
    captainpj
    • RE: Netflix's big collapse: Do you believe in streaming, international expansion?

      @captainpj You realize what happened right? The Starz deal was originally $30 million and then they wanted $300 million. Netflix was basically screwed at that point. Way in over their heads.
      MSFTWorshipper
      • RE: Netflix's big collapse: Do you believe in streaming, international expansion?

        @MSFTWorshipper Also, how long do you think it's going to take for studios to figure out that they can stream their movies themselves and cut out the middle man. Why have a contract and share your profits with somebody, when you can keep all the profits. I see more studios streaming first-run and their catalog rather then the hastle of having somebody else do it for you.
        pamark1
  • May they collapse....

    I'd rather have the DVD's myself. I don't do streaming. Got better things to do with my computers.
    Tholian_53
    • Got better things...

      ...to do with my <i><b>bandwidth</b></i>...
      fairportfan
  • RE: Netflix's big collapse: Do you believe in streaming, international expansion?

    Streaming and DVD/Blu-Ray made a pretty good combination, IMHO. And this ex-customer would have swallowed a 10-15% rate increase. But $12/month to $18/month was a 50% increase. They must have been smoking something in Los Gatos. I am surprised they have as many customers left as they do. Some people have to make choices with their (entertainment) dollars, and others simply want to be prudent. A 50% increase in price for a non-essential service sent folks running. Streaming can and does work--but companies need to not believe their own marketing hype.
    mike5335
  • It's too bad.

    But inevitable once the content providers found ways to present their content well. What Netflix had was the "killer app" with their website and streaming UI. Now with Hulu Plus that edge no longer really exists.
    MSFTWorshipper
    • Forget Hulu Plus.

      @MSFTWorshipper

      Paying the same or more money per month to be able to stream *primarily* TV shows that are available for free on broadcast TV, plus a selection of B-grade or *very old* movies? How is that better than Netflix?
      spdragoo@...
  • Net Who ??

    It's time to realize that NetFlix is becoming a "net who". Let's put things into prospective. A few years ago Blockbuster was king. International DVD rentals, great selection, just about on every street corner. NetFlix came along and bang !! Blockbuster was slow and did not pay any attention to its customer base. When NetFlix started offering DVD's and streaming. They rocked and rocked the boat they did. If blockbuster was going to be serious, they had to compete, they didn't. They rolled over like a dead dog ! NetFlix took the seat and it was full steam straight ahead. Blockbuster had every opportunity to dispose of but didn't. Blockbuster dies and wham !! Dish Network to the rescue.

    Now with the customer base and the new services, watch out DirecTV. But hold the lines, enter Reed Hastings. He not only destroys the company reputation with their content providers (I.E. STARZ), his creativity threw the customer base into an uproar with breaking DVD's and streaming service. REMEMBER that DVD service is what destroyed Blockbuster NOT STREAMING !! Then all of a sudden Blockbuster/DISH picks up STARZ. Then Reed Hastings slams the customer base with a fee increase. Blockbuster/DISH to the rescue with cheaper prices, faster services and CONTENT.

    The way I see it, the company has two options 1. Terminate Reed Hastings. This is by far the best and most likely to retain the customer and investor base. 2. Refund the customer base and retain pervious pricing plans. Along with this option they have to maintain the DVD and streaming as a SINGLE company and regain a content strength.

    Where is the consumer base in the picture, their NOT. Streaming might be the way of the future, but the domestic customer base is multi-lingual and NOT technical savvy. For the forseeable future, I see ???Net Who??? signs in the crystal ball. NetFlix will not have a chance in the international market if Blockbuster/DISH can deliver it first ! Keep in mind that Blockbuster/DISH was and is a international company NOT NetFlix.

    In summary, sorry Larry but Reed Hastings does not make sense to the customer base that made NetFlix what it is.
    DA70judge455
  • RE: Netflix's big collapse: Do you believe in streaming, international expansion?

    I dumped streaming and went with the DVD only. So DVD is dying? Streaming is the future? The amount of streaming content on Netflix is pathetic. When it cost $2 it was worth it, but I will not pay an additional $8 for it - and didn't.
    WindowWasher