Netflix Earnings: Expect Those Disks to Keep on Skipping

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Netflix's Disks Keep on SkippingThese are hard times for Netflix (NFLX). Shares of the leading premium video service were hammered on Wednesday after posting weak domestic subscriber growth and dailing back its earlier forecast of closing out 2012 with 7 million more subscribers than it had when the year began.

Many will argue that there is certainly nothing wrong with where Netflix is now. It's got a record 29.4 million streaming accounts worldwide, and there are another 8.6 million movie buffs enjoying its fading yet still lucrative DVD and Blu-ray rentals by mail. However, decelerating growth, the likelihood of a loss in the new quarter, and concerns about the long-term viability of the Netflix model are scaring away investors.

There are real problems at Netflix, and volatility -- always a major plot driver when it comes to this particular fallen growth darling -- will continue.

Split Flops

Netflix has now surrendered more than 80% of its value since last year's summertime peak above $300. However, in a testament to the stock's roller coaster ways, shares are actually trading well higher now than they were three years ago.

Last year's fall from grace began simply enough. The then dot-com darling wanted to establish its streaming service as a standalone platform so it split the services in two. Customers who wanted to continue to receive optical discs by mail and also Web-served streams would be hit with a rate increase of as much as 60%. Those who chose one platform over the other would save money.

Analysts initially loved the move, falsely believing that it would increase the average revenue per user that Netflix was collecting from its growing base of video buffs. It never panned out. As disc-based subscribers began to cancel -- and Netflix has gone from 13.9 million a year ago to 8.6 million now -- investors soon realized that the company was on a slow path to collecting only the $7.99 a month flat rate it's charging its 25.1 million domestic streaming accounts.

A Streaming Economic Indicator

Netflix is scrambling to grow overseas, even if it presently means losing more money internationally than it's making on its domestic streaming business.

We're starting to learn why.

In Netflix's third quarter report -- the one where the company conceded that it would fall short of its goal of 7 million net streaming additions in 2012 -- it revealed that it's having a problem with involuntary churn.

These aren't folks that are cancelling the service because they don't want it. We're talking about accounts that Netflix itself has to dismiss because they can't charge their credit or debit cards for the monthly dues.

Yes, Netflix has expanded so deep into the marketplace that it's down to the lower-income homes where $7.99 a month isn't a luxury.
It makes sense. Netflix was never going to get most of the roughly 120 million households in this country on its plan. It's not just about the necessary broadband connectivity hurdle. Too many people have already tried the service and moved on. There really aren't too many folks in this country that have never heard of Netflix by now.

It could also get worse, especially as the competition intensifies.

Rivers of Content

When it comes to a streaming smorgasbord of TV shows and movies, Amazon.com (AMZN) is the only company that comes close.

The leading online retailer is making a growing catalog of online video available to Amazon Prime customers at no additional cost beyond the $79 a year that they pay for free and expedited delivery of Amazon-warehoused goods.

It turned heads last month when it struck a streaming deal with EPIX, pouring another 2,000 movies into Amazon's vault, including recent retail releases "Iron Man 2," "Super 8," "True Grit," and "Rango." The move ended an exclusivity deal that EPIX had with Netflix before that. Amazon's Prime Instant Video service now has more than 25,000 movies and TV show episodes.

Hulu is also gaining momentum for its Hulu Plus premium platform. And Coinstar's (CSTR) Redbox is teaming up with wireless leader Verizon (VZ) to roll out a service by year's end.

Netflix is hoping that original programming will help, and there are four series coming exclusively to Netflix next year. That should help, especially the springtime rollout of a highly anticipated fourth season of "Arrested Development." However, between sluggish domestic streaming growth, profitless international expansion, and the shrinking state of its mail-based business it seems that Netflix may never live up to providing the financial growth that investors really want to see on the screen.


Motley Fool contributor Rick Munarriz does own shares in Netflix. The Motley Fool owns shares of Netflix and Amazon.com. Motley Fool newsletter services have recommended buying shares of Netflix, Amazon.com, and Coinstar. Motley Fool newsletter services have recommended creating a bear put ladder position in Netflix.







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