Netflix stock plunges as subscribers quit
money.cnn.com
money.cnn.com
As for the drop in subscriber numbers, it's understandable that people don't like price hikes, but losing less-profitable DVD customers may not be a bad thing in the long run. Postage and regional distribution centers are a drag on the company. Reducing those costs frees up funds for content distribution deals.
I see it the other way, the recent separation in prices were done to isolate dvd profits from the rest of netflix. Make no mistake that the studios are already working on deals that will bleed netflix dry. They will look to squeeze every last penny of profit out of the streaming division. By separating the 2 units, netflix is making sure the dvd unit can chug along merrily with their relatively fixed profits that the studios can't bargain for.
Fewer subscribers = More articles about fewer subscribers = FUD = Lower stock price <- Not the problem.
The movement of the stock price doesn't affect Netflix' viability as a business. Kudos to them for making the business more targeted towards online streaming. I hated having to pay for physical DVDs when all I used was streaming. I switched my plan as soon as I could.
I don't use Netflix all the time. For most shows, I auto-steal them after they air. For casual watching, I use Netflix and watch things like Pawn Stars, Trailer Park Boys, and other series long after they've aired. It fills the "I just want to flip on the TV and see something I wasn't expecting. I don't care what it is" need.
That's not the problem. In fact, it might be the solution. What matters is profitability, not revenue.
I'd break their costs down into per-byte costs and per-subscriber costs. The fixed content costs are only fixed until they renegotiate their contracts. Most media businesses look to merge with the content creators to eliminate those costs altogether.
I believe the real discussion going on is whether Netflix has a viable long-term business model. I believe they do, and I'm glad they got rid of DVDs.
25 million customers at $10/month was the old calculus;
24 million customers at $16/month is the new calculus;
I don't see any problem here. At all. (Okay, I'm handwaving because I'm too lazy to actually look up the revenue figures, but losing subscribers when you raise your prices is not necessarily a bad thing at all.)
Netflix's own document lays out the forecast pretty well: http://files.shareholder.com/downloads/NFLX/1403529688x0x500... (see Venn diagram). Too bad the CNN article doesn't delve into these details.
The real danger to Netflix is not subs leaving because of price hikes (what alternative do you have really, shell out $70 per month to Comcast for horrible TV content?) but disruptions to their content sources, like the recent Staz debacle.
I feel this way because I'm convinced the internet is revolutionizing distribution. Therefore, Netflix is way ahead of the game (if you buy what I'm saying).
Production costs are plummeting anyway - it's just that big-budget movies always spend about the same amount, but now that money goes farther.
I end up with (d) only when the content is not available on the first three. I can't say I have any particular bias - so "monopoly" is perhaps an overly strong word.
I found an estimate[1] that Amazon has 121-131 million customers, of which about 5 million are Prime members. Those prime members pay less per year than a Netflix streaming customer, and they pay it mostly to get free 2-day shipping, so they're already deriving a lot of value from it even without the streaming. Amazon just dropped a big library (although not as big as netflix's...yet) of free streaming videos in their laps. Word will spread, plus they get to advertise this new service essentially for free to their other 120M+ customers. They also have tons of servers to handle all of this.
Amazon could also elbow in on netflix's DVD rental service pretty easily. They already have a worldwide rapid-shipping system in place, including handling plenty of returns. I'm sure they could add DVD rentals with two-day shipping each way if they wanted to. I'm guessing they don't want to, because they don't see a lot of profit in it, and maybe also because it could hurt their already-established business of selling DVDs.
[1]http://www.quora.com/What-percentage-of-Amazon-subscribers-p...
All that being said, I don't think it's all that important. I wasn't trying to imply that 5M current Prime members compare to 24M Netflix streaming customers; I was trying to say that they have a really big foot in the door, which they could use to rapidly leverage their way into the market. The more important number are the 120M+ customers. Amazon can pitch them with, "You didn't want Prime for shipping, but maybe you'd like it for videos! (Especially if you're dissatisfied with Netflix!)" There are also rumors that they will soon let Prime members "rent" eBooks on their kindles for free (with a limit on the number of titles they can have at any given time). That would pull more people into Prime, and some of those people would inevitably take advantage of the free streaming.
Amazon is formidable competitor, but their collection is tiny when compared to Netflix's DVD collection, and is still small when compared to their streaming content. So, on a Friday night, my options are generally:
Netflix streaming Large selection, trivial to use
Redbox Super tiny selection of blockbusters, $1, needs a drive
Amazon Small collection, need to pay on top of my Netflix subscription
YouTube Good luck with finding the content and in one piece, need to connect the laptop to TV, or a box, e.g. Google TV (although my wife watches soap Operas from our home country that way, can't get it anywhere else).
bittorrent HUGE amount of content, although I've never done it, the virus risk and illegality puts me offFor being such a tech-savvy group of people, I'm rather disappointed to have heard this line so often from HNers. When was the last time there was an exploit found in the codecs for popular formats such as XViD or x264?
"Cancellation will be effective immediately - no refunds for partial months."
... That made me even more determined to get out of there. I can't believe they think I'll be back if they have that attitude.
My fear now is that the golden age of rental DVDs will come to an end before I have finished enjoying it. I want to be able to watch older or obscurer films, and the disks are better for that, probably because they don't require me or the rental company to acquire and maintain a stupid never-ending oft-renegotiated contract with a movie studio and its lawyers.
> Return outstanding DVDs within 7 days of cancelling to avoid charges to your credit card.
> Cancellation will be effective immediately - no refunds for partial months.
> Instant streaming on your computer or via any Netflix ready device will no longer be available.
I also went to cancel but Netflix placed the "No partial months" stipulation as the second sentence on the page. They did not bury the terms and they did nothing underhanded as your post implies.
However, as they currently structure it, these two services (DVD vs. streaming) could be separate companies and now almost compete for the same dollars.
Also I wonder if the loss of Starz is a bigger impact to their stock price than the lack of subscriber growth.
I love the concept and want to support the company, but I feel like the value of their offering just dropped drastically (I lost the DVDs by mail, so down to half the content, then losing Starz means that I'm essentially getting 1/4 of the content - if that - for the same price).
Previously we just let the subscription get charged, even if we had a busy month and didn't watch anything, but I feel like if I'm going to have to go to that "Change Account" screen then "Cancel" is going to be the most appealing option.
Netflix needs to do a better job of engaging it's customers and explaining the reasons behind the price hikes, and offering an incentive to stay - even if it's "hey, the studios are screwing us, please stick by us and be part of ending that messed-up system".
Example: Netflix licensed content from Starz for $30 million/year. Starz licensed content from Sony, but agreed that only a certain number of people would watch via the internet. So Sony movies got pulled from Netflix "temporarily". And Netflix had to up their offer for Starz from $30 million/year to $300 million/year - and Starz decided it still wasn't enough, because they were worried about people watching their stuff for $8/month hurting their other $1.3 billion/year revenue stream.
Interesting sources: Sony licensing problem: http://www.deadline.com/2011/06/starz-tells-netflix-to-yank-...
Starz income, 1.3 billion vs 300 million: http://www.tribecafilm.com/tribecaonline/future-of-film/Insi...
30 million to 300 million for Starz: http://www.hollywoodreporter.com/news/netflix-offered-starz-...
And their interface on Roku is even worse
- ugly, long lists of movies with no way to search or skip through the list
- all seasons for a series (I think Doctor Who has some 20+ seasons there) are placed in the above list as individual shows (rather than being grouped together), and are not even in chronological order
Netflix's interface on Roku is a godsend in comparison.
I'm basing my catalog comparison on the fact that I found most of the things I watch with Netflix also on Amazon. Maybe my particular interests have a strong intersection with Amazon's selection, though.
Eh? No, they do have a search screen.
Though I agree a Netflix-style queue would be nice.
The postal service is itself trying to shut down Saturday delivery and night delivery. My dad is a postal worker. Him and most of his fellow coworkers do not have a problem with this change. They know the service is in trouble so they are willing to make compromises. This means that at least some of the changes are going to go through but they have to be authorized by Congress first. Right now the only reason why it hasn't happened yet is that some Congressmen are scared of how these changes are going to affect rural areas in their district. This change by nature is going to lessen the value of Netflix's DVD service. The question is by how much? You would have to order your movie by Wednesday or you're not going to have anything to watch over the weekend. Netflix really does not have any control over this.
The streaming sides problems are of course that everyone wants a chunk of the action. If Netflix wants to stream newer movies then they are going to have to pay up. Netflix streaming already has a wide assortment of movies but the most popular section of any video store is the new movie section. Its the same with Netflix as well. Hollywood learned the lessons of the music business vs Apple. They do not want to see that game played again. Apple has a stranglehold on the music world right now. Netflix is not going to be afforded the same luxury in doing the same with movies.
The crazy part is that, for me at least, $16 for unlimited streaming and one movie at a time is not a bad value. But it is the jarring way in how they raised the price which had me ready to quit the service all together. The $6 jump felt like a screw you.
[1] http://www.reuters.com/article/2010/11/11/us-levelthree-idUS...
> Hollywood increasingly sees Netflix as a problem rather than an additional avenue for revenue. The studios may be concerned about creating another iTunes (virtual monopoly)
I think they see the NFLX subscriber numbers and are simply looking to get a bigger cut
>There's no offline viewing. IMHO Apple will increasingly address this market. Netflix needs to as well. When people are mobile they usually don't have a sufficient data connection, particularly if on a train or plane.
I don't believe that is how NFLX perceives itself. They seem to understand their market is a niche, and they don't see themselves as the place to go for the latest TV episodes, for example.
>Netflix seems to want to go the HBO route of creating original content.
I believe they see their ability to directly negotiate with studios (i.e. content creators) as a major source of leverage when dealing with the content owners moving forward.
Edit: Fixed horrible formatting. This was a response to cletus that got interrupted by a minor office fire drill :(
I don't know, maybe the percentage of people who use bittorrent will remain small enough that it won't really affect the studios, but their tactics strike me as self-defeating. I mean, nobody wants to have to jump through hoops to get to the content they want to watch. When torrenting becomes the path of least resistance, it'll be interesting to see what happens.
You have to keep this in the context of the non-tech mass market. For them, the content is on TV now. Turning on the TV is easy. The studios aren't making content harder to get as long as it's available on TV. Netflix/iTunes/torrenting is not easier than turning on the TV (for most people). Most people don't consider turning on the TV to be a difficult hoop to jump through.
Yes, I know that some shows aren't available in some countries. But then, the vast majority of people are likely not even aware of shows that don't air in their markets (i.e. foreign shows).
Some of it is, yes. If we were talking only about television programming, I'd agree this is mostly true. I mean to be referring to content in a broader sense though, although I might not have made that point explicitly.
> Turning on the TV is easy. The studios aren't making content harder to get as long as it's available on TV.
Right, it's easy to turn on the TV, but is the content you want on? At a time when it's convenient / possible for you to watch? I mean, one reason things like VCRs, Tivo, Netflix, bittorrent, etc. became popular in the first place is because the content wasn't conveniently accessible by simply being in front of the TV at the right time.
> Netflix/iTunes/torrenting is not easier than turning on the TV (for most people).
I don't know... sometimes I think us geeks overstate the difference between "us and them" where "them" are "the unwashed, untechnical masses who are deathly afraid of technology" or whatever. I mean, yeah, there probably are more people who aren't using, say, iTunes, than people who are... but I'm guessing that penetration of this kind of technology is growing and that a larger and larger group of people are starting to care about the kind of convenient access you (can|could|whatever) get from iTunes, Netflix, bittorrent, etc. Maybe I'm wrong, but that's just my perception.
Most people don't consider turning on the TV to be a difficult hoop to jump through.
I always found that Dish Network had a really reliable content rating system--it was an objective star system not based on user preferences. Some combination of this with tailoring to individual users might be the best fit for Netflix--it would help users find content, but it would also provide an objective measure that lets me validate the 'users like me' rating system the use now. If Netflix had a better algorithm/system for helping find content, and a dash of Hipmunk UI, then I'd still be a customer.
Also, people paid for separate Netflix accounts because they each wanted their own accounts for DVDs. Now that Netflix upped their device count to a whopping 50 and split DVDs and Streams, I wouldn't be surprised if everyone went Stream only and shared their account with 10 other friends. That's certainly what I'm doing. As for DVD's? Well, piracy has become what's convenient, and I now have no ethical issues with it.
"One analyst predicts that Netflix's streaming content licensing costs will rise from $180 million in 2010 to a whopping $1.98 billion in 2012." - Netflix needing to reprice to deal with that change is -why- people are quitting, and it's been a known problem for several months now, so why did the stock drop wait?
Rising costs are in the horizon, and it's not known if Netflix can leverage its position to strongarm a better content licensing deal.
Their anime library also seems to be improving so for me it's become a more valuable alternative than an HBO/Cinemax/Showtime/TMC subscription.
I hate price increases too but is there is any proof that Netflix is profit-gouging subscribers? Or are their suppliers jacking up the prices and Netflix has to pass it along somehow vs become the next Blockbuster?
Hollywood doesn't care about markets nor allowing demand to pick the products and services that are best for consumers. Let's get parity between movies and music by instituting compulsory licensing for movies and video media. Once MGM has "performed" or distributed their newest blockbuster, others are allowed to follow suit as long as they pay the licensin fee.
But their price/earnings ratio is still 42.86, which seems high. For perspective, Microsoft is at 9.99 (disclaimer: I own some) and Apple is at 15.56.
That means Netflix could double their earnings, and still cost more on a per earning basis than Apple. I just don't see it as a good buy, especially with some tough competitors in streaming content like Amazon, Apple, Hulu, etc.
It seems to me like there's lots of very solid buys that are undervalued, going for a sexy industry with a high P/E, no dividend, not much in the way of patents or strong assets, and tough competitors... yeah, I think Netflix is a brilliant company, but I'm not buying their stock at these prices.
If I had to pick I'd pick higher prices and better selection. So my hope is that Netflix is sincere when they say they raised prices in part to get a bigger selection.
I quit Netflix streaming because I didn't want to pay more for a selection that has become smaller. I will rejoin if and when they bring a bigger selection.
I'm interested to see how Netflix is going to respond to this. I expect them offer new deals to try and recover users. I canceled my service three weeks ago
If you want content free from Hollywood, give YouTube a try.
Netflix movie selection doesn't seem to be great. In my case I subscribe to it for the TV shows more than anything else and for $8/month, the cost is easy to justify. YMMV.
I see Netflix's problem as this:
- Hollywood increasingly sees Netflix as a problem rather than an additional avenue for revenue. The studios may be concerned about creating another iTunes (virtual monopoly);
- Studios and distributors increasingly want to go on their own, which is really bad for consumers and seems to be driven by simple greed of cutting out the middleman without realizing what that middleman is actually doing for you;
- Netflix uses Amazon for scale. This is a problem. As much as burst architectures have theoretical advantages, the costs just don't add up beyond a certain size. I cannot believe that Netflix isn't at the point where they'd be better off owning their own servers;
- There's no offline viewing. IMHO Apple will increasingly address this market. Netflix needs to as well. When people are mobile they usually don't have a sufficient data connection, particularly if on a train or plane.
Netflix seems to want to go the HBO route of creating original content. This is an incredibly dangerous game to play with them forking out big bucks [1]. At least AMC's content in comparison is relatively cheap to produce and they have a relatively stable income due to cable bundling (although they're struggling with rising costs of Mad Men).
EDIT: Let me clarify. 2012 price hikes don't drive consumers. Current value and current price hikes drive consumer behaviour. The recent price hike in DVD+streaming will no doubt have caused some to drop the service. They could drop either streaming or DVD or possibly both.
I'm inclined to believe that DVD is an ever-smaller piece of their business but it may yet be significant to have a real impact on subscriber counts (in terms of subscriber loss).
[1]: http://www.reuters.com/article/2011/03/21/idUS17633242872011...
It's not a theoretical price hike in two years. My bill goes up at the end of this month.
I would guess they believe the capitol to be gained through continued growth (or the capitol to be saved in a decline) eclipses the added cost of relying on Amazon.
In other words, owning your own servers is good for a stable market. They probably believe their market is still too volatile to depend on their own servers.
I'm guessing that Netflix has probably spent a few minutes more than you analyzing their infrastructure costs. Sure they could have made a mistake and are being less efficient by using Amazon over their own data centers but I have a hard time believing that the mistake is as obvious as you seem to think.
The net-net is that Netflix could have saved 20-30% on their infrastructure costs by not going with Amazon, but then they would have to hire smart operations and infrastructure people. They wanted to focus on Software, and had no Operational leaders in their organization, so they walked away from that 20-30% infrastructure savings - likely because they realized that over time - infrastructure costs are not going to be particularly material to their overall cost of business - which will be dominated by the cost of the content.
If you do it yourself, you don't just have to worry about money, but also how to hire good operations people, and what effect all those extra people are going to have on your organizational structure, internal culture, etc.
What I meant by "And then they would have to hire smart operations people" is that that is both (a) challenging, (b) fraught with risk, (c) not something anybody at Netflix with a sufficient seniority was interested in doing.
It wasn't that those staff cost a lot of money, though at the time, Netflix was paying a bit more for infrastructure staff, it's just that nobody was interested in building an operations empire. If they'd had a Chief Infrastructure Officer who had a passion for doing it, Netflix would have paid approximately 20% less for their infrastructure costs. But, at the end of the day, given they didn't have that CInfO, and 20% less on infrastructure wasn't that material to their business, they just outsourced it all to Amazon.
As for transcoding videos, they probably have a far more burst-like intake of movies, yet not a very large burst at that. How many tv shows are released per day? How many movies come out per day? Not too many, compared to a service like youtube that has to transcode huge amounts of information all the time. EC2 at least lets them turn on machines until they finish, at which point they can easily scale down after the burst is handled.
Netflix uses LimeLight, Level3, and Akamai for streaming, and you probably need a bigger footprint then you think for that. Building out a usable global streaming network is going to take more then a handful of EC2 instances.
I don't see why that's unreasonable -- they've had instant viewing for quite some time now, but the online collection has been woefully lacking for an equally long amount of time. It's very reasonable not to be satisfied with the 2 day turnaround time on good stuff, when thousands of B-movies are available instantly.
If they hadn't introduced all 7 seasons of TNG, I would have quit too.
Thanks for the heads-up, I didn't know that.
I am in the process of cutting the cable, for which purpose I put together an htpc using xbmc on top of xubuntu to watch hulu, Amazon instant videos, and files ripped from my collection of DVDs. I was originally planning to supplement this with netflix on my Wii, but actually dropped the idea: most of my favorite sci-fi shows are free with Amazon Prime (which I already have anyway), and in the long run it's cheaper to buy seasons of my daughter's children's shows (Dora, Backyardigans, etc.) from Amazon rather than pay for Netflix indefinitely. Also, I can watch the Amazon shows on my htpc so I don't have to switch to the Wii to play one of my daughter's shows.
We don't watch cable TV either. I've a big plasma TV in the living, with a PS3 and a PC attached to it. We do Netflix on the PS3 (streaming and discs), but so far the PC has only been used for games, some browsing, and the occasional Jon Stewart show.
But all that may change at some point. Thanks for the heads-up.
i went back to piracy for movies a few months ago when i realized that there were actually good movies that came out in the 3 years I'd been relying on Netflix.
i still use Hulu for TV, but that will change if their content does.