Is the Future of Netflix's Streaming Business in Jeopardy?

Joel Anderson  |

It seems clear that Netflix (NFLX) believes that its streaming business is the key to its future. The company is aggressively pursuing new talent, and the impetus for its Quickster fiasco last year that set the company's stock back some 80 percent was a shift away from the traditional DVD-by-mail service.

Now it also seems clear that investors are on the same page with Netflix as share in the company fell 13.9 percent after its most recent earnings report showed slowing growth for its streaming services among American customers.

Earnings Beat, but Projections Send Investors Running


Netflix beat expectations for both revenues and earnings in the earnings report for the first quarter of 2012, released after market close on Monday. Revenue was $869.8 million, better than the $866.6 million expected from averaging a poll of 27 analysts by S&P Capital IQ. The company also posted a net loss of $4.58 million or $0.08 per share because of the cost of expanding its business into England and Latin America. This was well ahead of the $0.26 per share loss predicted by a poll of 23 analysts, once again by S&P Capital IQ.

However, the earnings beat proved not to be the important detail of the report. Netflix projected growth numbers for its American streaming subscribers between 190,000 and 790,000 for the current quarter, well behind analyst estimates that exceed 1 million. This was most likely the primary motivating factor in the sell off that started in after hours trading on Monday and carried over into Tuesday.

Streaming Business Seen as Best, Brightest Future

It's clear that Netflix needs to expand its streaming business, but its not as clear where Netflix will continue to find those customers. Continuing to expand is seen as crucial by some, with the need to stay out in front of the trend towards online steaming being very important.

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"They guided to subscriber growth dropping a ton quarter- over-quarter, and some people think as soon as growth stops, this thing's over," said Wedbush Securities Inc. analyst Michael Pachter. "They are saying, 'We're not going to grow very much and instead we're going to focus on making money.'"

Netflix is planning to court new streaming customers by creating its own original content and spending more on the rights to other content, offering a wide array of entertainment options through its services that couldn't be found elsewhere. Reed Hastings has even been quoted as saying that he views Time Warner's (TWX) HBO as Netflix's "biggest competitor." Hastings was upbeat on Monday.

"We're growing content spending and content offerings very aggressively going forward, and revenue is growing faster than that," he said.

Can Netflix Excel in Content Creation?

With a glut of new competition in the streaming content market, it's not clear that Netflix can continue to stay competitive. Verizon (VZ) announced earlier this year that it planned to launch its own DVD and streaming service with partner Coinstar (CSTR), and Hulu, an online streaming site specializing in television, is now offering Hulu Plus, a subscription service that includes many television offerings as well as a catalog of movies.

Netflix finds itself in the unenviable position of paying more for its content while also seeing its user base erode from a combination of increased competition and last year's disastrous series of mis-steps. However, the push to create new content may hold the key to the company's future. Netflix has already agreed to finance new episodes of cult favorite Arrested Development, as well as producing Lilyhammer, a show about a mobster in Norway starring Steven Van Zandt of E-Street Band and The Sopranos fame. The company has also licensed horror series Hemlock Grove and prison comedy Orange is the New Black.

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