Netflix Not As Exposed As Everyone Says
September 30, 2011
In September, Netflix President/CEO, Reed Hastings, wrote an apology to its subscribers for how it handled the price increases earlier in the year. At the same time, the company split up its streaming and DVD by mail businesses. While the streaming business would still be called Netflix, the DVD business would now be called Qwikster.
In the last few months, Netflix has taken quite a beating from the press, customers and analysts, and its stock price has dropped dramatically in the last few months. In July 2011 before Netflix announced the price hikes, Netflix’s stock price reached US$300, but by late September the price declined to just US$127, a loss of more than half its value.
In fact, Netflix recently said that it may lose up to 1 million subscribers in the quarter when it releases its figures in October 2011. It seems that dropping Netflix has become popular with consumers, much like cord-cutting.
Did Netflix make the right move in splitting up the company? Initial observations were quite negative, but upon closer inspection it was perhaps the best thing the company could have done to ensure its future. Clearly, the streaming business is the future of the company, while DVDs by mail is its legacy business. Splitting up the company was the best thing Hastings could do for shareholders, perhaps. Netflix was doing a lot more innovation than the Qwikster business. How much more can Qwikster innovate with DVDs by mail, for example?
As two companies, Netflix is now free to negotiate Hollywood licensing deals without impacting its DVD business. It can also do much more, like producing its own original content. Although Netflix recently lost out on acquiring content from Starz, it has already taken advantage of the original deal by growing subscribers and gaining popularity with consumers. In 2008, Netflix was able to license Starz content for about US$30 million, which was considered very low at the time. On the strength of Starz, and other deals brokered early with Netflix, the company was able to grow its subscribers to 25 million around the world. A few months ago, Starz and Netflix were unable to come to a licensing agreement after Starz reportedly wanted about US$300 million, or 10 times the original amount to continue its existing deal.
Although consumers may consider dropping Netflix, it still seems like the company has positive momentum. After all, the majority of Netflix are not cord-cutters; they are consumers that use Netflix as a backup VOD service, when there’s nothing good on TV. Or as alternative to their Pay-TV Provider’s VOD service. Paying an extra US$8 per month is seen by many consumers, as a good way to keep up with a huge back catalog, and catching entire seasons of TV shows. As long as Netflix can continue to keep its prices low, have a decent recommendation system, a great UI and titles that consumers want to watch, it should do fine.
Analyst Commentary: Another sign of good news is that Netflix recently signed a deal with Dreamworks to stream its popular animated features on Netflix starting in 2013. It also launched a Latin America Netflix movie streaming service in the last month, which could net the company millions of more subscribers. Plus, shedding the DVD business will definitely give Netflix a boost when it comes to content licensing and being nimble. It may also be a great way to either sell or acquire a similar business. Qwikster can be easily sold off, or Netflix can also merge with another service like VUDU or Amazon’s movie streaming service.
Nevertheless, things won’t be easy for Netflix now. After the PR mess, the price increase and splitting up the company, Netflix is no longer universally loved by consumers. There are plenty of hard feelings over the price hike. It must earn back the love slowly, and gain the trust and respect from subscribers or risk becoming a company that is shunned and hated by consumers.
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Second Analyst Commentary: When Netflix made its first announcement about the price change and splitting off the streaming business several weeks ago, we said then that this was a good long-term move because it was clear the company has plans to move into premium and newly-released content and away from distributing lots of DVDs at a lower profit than with streaming. We still believe this, considering the recent agreements to add Discovery and Dreamworks to its contributors, and that Netflix will actually own and sponsor original content for theatrical and TV releases. This is the kind of expertise that Google would love to have, and shouldn’t be counted out as a potential buyer of Netflix’s streaming division. Also, Netflix’s new campaign into Latin America promises to add double-digit percentages to its subscriber base in 2011-2012. |
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DISH Network's Streaming Movie Service
September 2011
U.S. Satellite Operator DISH Network announced a new streaming movie subscription service, under the Blockbuster brand, that will deliver movies and TV shows to DISH subscribers. Blockbuster will have 3,000 movies available via streaming to TVs and PCs, as well as over 100,000 DVDs available by mail. The price for the service is US$10 per month, although new subscribers for DISH will get Blockbuster free for 12 months, as a promotion.
Analyst Comment: Because the service requires a DISH Network subscription, it’s not a credible threat to Netflix. Limiting the service to its own users is likely a way to try to draw subscribers to the DISH Satellite service, as well as a concession to Content Owners. In addition, DISH is also one of the companies reputed to be in the running to acquire Hulu, which is in the middle of an auction. |
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Brazil Allows IPTV Services
September 2011
After many years of delays, Brazilian President Dilma Rousseff signed the PL 116 bill (formerly PL 29) in early September, which effectively opens the Pay-TV market to Telcos. The new law also establishes local programming quotas on Pay-TV channels.
In addition, Brazilian Telco Global Village Telecom (GVT) launched a new hybrid Pay-TV service (using Satellite and IP for on-demand) in 16 cities across the country. In October 2011, GVT will expand the service nationwide. The new service will include 140 TV channels with 30 in HD. The Telco said it invested about BRL650 million (US$359 million) in the new service.
In August 2011, the Brazilian Senate approved legislation that allowed Telecom Operators and foreign-owned companies to offer subscription TV services. Already, however, Netflix launched its own Latin American video subscription service.
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