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Opinion: Financials falter on Netflix plays

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Third-quarter financial results for Los Gatos, Calif.-based Netflix Inc. don’t paint as bleak a picture as one might think, but further analysis reveals a company that could be in dire straits.

Since July, Netflix has made three key announcements that have garnered a mix of praise, confusion, frustration and outright anger from customers and fans. It started July 12, when the company put forward a new pricing plan, separating its DVD and streaming services and charging more in the process. On Sept. 18, Netflix CEO and co-founder Reed Hastings announced DVD rentals would be moving to a new Web site under a new name, Qwikster. Less than a month later on Oct. 10, Hastings was back to pull the plug on Qwikster with little explanation. The DVD portion of the business, consumers were told, would remain at Netflix after all.

Mass speculation and discussion has sprung up after all three announcements. But let’s take a minute to look at the numbers behind the news.

In the third quarter, Netflix (Nasdaq: NFLX) recorded $62.46 million in net income, a 64.5 percent increase compared to earnings of $37.97 million in the same quarter a year ago. The company also increased its total subscriber count to 25.27 million from 16.93 million, during the three months ended Sept. 30.

In this situation, however, it is important also to compare the company’s latest financials to its second-quarter results for the period ended June 30, as the figures show the company’s status before the questionable announcements were made.

In the second quarter, the company posted $68.21 million in profits, with 25.56 million total subscribers. Those earnings are 8.4 percent higher than in the third quarter, and there were 292,000 more subscribers than in the most recent quarter. In the U.S. market, roughly 805,000 subscribers scurried during the third quarter.

It was likely with a head full of these figures that Netflix CEO Hastings made his second announcement – saying goodbye to Qwikster before it even began – as it was made 10 days after the end of the third quarter.

In all of the hubbub, Netflix stock has plummeted. The company’s stock closed at $291.27 on July 12, the day the pricing changes were announced; at $281.53 on July 25, the day it released its second quarter results; at $143.75 a day after the Qwikster announcement (which was on a Sunday); at $111.62 after Qwikster was canceled; and at $82.97 at press time.

The stock marked a new 52-week low of $74.25 about two weeks after announcing the Qwikster change. That’s a far cry from the $304.79 per share high of the last year.

The take from this? Some fans are putting their money where their mouths are, but it is far from all of the company’s customer base. Investors, however, seem worried, to say the least.

Other companies can learn from this.

Redbox, for instance, handled a recent price increase a bit differently. In moving its daily rental charge for DVDs to $1.20 per day from $1, the first price change in more than eight years, the company first notified customers directly via e-mail and cited rising operating expenses.

Though not a direct competitor to Netflix’s home-based services, it is possible Redbox hoped to avoid a scenario like that of Netflix, which presented its price increases as if it was providing convenience for the customer by adding separate plans.

With the current state of Netflix stock and with knowledge that the flip-flop Qwikster decision was made following the third quarter, it will be interesting to see the company’s fourth-quarter results.

Still, it is unlikely Netflix will take a game-ending hit. Though other companies such as Hulu, AT&T and HBO now offer similar movie and TV streaming services, veteran Netflix has honed its craft. Until another company can figure out how to top the Netflix model, it likely will remain king.

Springfield Business Journal Web Editor Geoff Pickle can be reached at[[In-content Ad]]


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