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Yesterday, Netflix announced that its aggressive international expansion plans will bring its internet movie and television streaming service to the U.K. and Ireland in early 2012.

The announcement should have been a bright spot for a company which has been flying high for the past several years. But it was overshadowed by a bout of bad news: last quarter, Netflix lost 800,000 subscribers in the U.S.

The loss is. as you might have guessed, primarily attributable to Netflix's splitting of its DVDs-by-mail and online streaming services, which effectively represented a significant price increase. This, not surprisingly, was followed by a customer uproar.

Faced with angry customers threatening to ditch their Netflix subscriptions, Netflix CEO Reed Hastings took to the Netflix blog and issued an apology.

However, he didn't do anything about the price increase, and to make matters worse, he announced a rebranding for Netflix's DVDs-by-mail service, a rebranding that was canceled after it sparked even more outrage.

Customer anger and threats, of course, don't always materialize into action, but now we know that they did for Netflix. "Our primary issue is many of our long‐term members felt shocked by the pricing changes, and more of them have expressed that by cancelling Netflix than we expected," the company admitted as it released its Q3 earnings. On the flip side, well under 10% of those subscribers who stayed signed up for both the DVDs-by-mail and streaming packages.

Investors, who had previously seen its stock price top $300 just months ago, battered the company on the news, shaving more than 25% off its value yesterday after hours. When the markets open today in New York, a share of Netflix stock will probably be yours for under $90. Talk about 'ouch!'

The good news for Netflix is that the company isn't the internet version of Lehman Brothers. After all, the company still has nearly 24m customers. But Netflix's missteps in the past several months have created some long-term challenges that, if not dealt with appropriately, could prove very detrimental.

Reuters' Felix Salmon explains:

In hindsight, it’s pretty clear that Netflix CEO Reed Hastings let the bubblicious stock price — it briefly topped $300/share at the beginning of the quarter — go to his head. The company was swimming in money! And so, in September, Hastings signed a deal to pay $30 million per movie for everything that DreamWorks creates, in return for the right to stream those movies a few months after they’re released on DVD.

It’s known as the “pay-TV window”, and in order to wrest those rights from HBO, Netflix had to outbid HBO, which was reportedly paying something in the neighborhood of $20 million per movie.

He goes on:

A lot of ink has been spilled over Netflix’s decision to separate its DVD and streaming businesses, and to increase its prices sharply. Those decisions are, surely, the proximate cause for its torrid present. But the big-money deals show the same amount of arrogance, with even less business justification.

It’s obvious why companies raise prices: they think they’re going to make more money that way. But why would Netflix spend hundreds of millions of dollars preventing movies and TV shows from being shown on HBO? That’s much less obvious.

Salmon suggests that Netflix's strategy was "sub-optimal" for all parties involved, and that if it wasn't riding so high, it might not have been so eager to sign deals that, in retrospect, were perhaps too rich.

Which raises the question: where does Netflix go from here? Its plans have been largely based on the assumption that it would continue to grow at a certain pace and enjoy the luxuries that come with an exorbitant valuation.

Now, with the company losing subscribers and facing losses in the short-term, it's not inconceivable that Netflix will never be the same again.

Patricio Robles

Published 25 October, 2011 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

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