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Netflix scores $1bn own goal after company shoots off mouth

Throwaway comment ruins investor confidence despite solid results

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A throwaway comment in the Netflix results (PDF) – suggesting that the Olympics will impact everyone's TV watching, including Netflix customers – has the company in PR trouble once again, with deeply suspicious investors, ready to jump at anything. After an innocuous set of results which looked like it had almost done enough to keep Netflix out of trouble, this comment has now shaved $1.1bn off the share price, taking its value to $3.3bn in a single day.

The actual underlying Netflix had not quite done enough to repair the damage to its investor confidence, and it may be many more quarters before it achieves that, if indeed it ever does, but it had managed to produce a set of figures which in themselves did no harm, for the first time in the last 12 months, with record revenues of $889m, a return to a marginal profit of $6m, about 10 per cent of its profits a year ago, a minor increase in its cash balances to $813m and a sensible cut in content spend.

We have applauded the content spend of Netflix for the past year, re-freshing its Spanish content for its Latin American launch, tying up local content in Europe and putting money into original content in the US for its domestic operations, but now it has slowed its quarterly upfront payments for content to £374m and continues to hold content worth $1.2bn in its books unamortized as yet.

Domestic US streaming customers have gone up by 530,000 to 23.94 million, DVD subscribers have fallen 850,000 to 9.52 million, while international streaming customers have gone up 560,000 to 3.62 million. The net result has been a rise of 240,000 customers.

But there were signs everywhere that Netflix was making a comeback until the final comment. One interesting thing about that is that at the current rate of reduction of DVD rental customers, falling 2.76 million two quarters ago then 1.08 million last quarter, and now only 850k, the chances are there are about 3 more quarters of fast erosion, by which time Netflix will retain just over 8 million DVD rental customers. Slowly over time these will then shift to online, either with Netflix or with rivals, but the artificially negative effect on Netflix revenues is likely to lessen dramatically after the next few quarters, with perhaps only 500,000 falling away next quarter, 300,000 the quarter after that and so on.

Netflix then warned that in the coming quarter the Olympics will have a negative impact on both viewing and sign-ups and so it adjusted its Q3 guidance to between 1 million to 1.8 million domestic adds, saying that if it finishes on the high end of that range it is on track for 7 million domestic net adds in the year. But it had already made 7 million its target for the year and it was asking for trouble bringing it into question.

The company now says that it will take three years for its brand to recover after its price increases, and it is now one year into that process.

On the content front, Netflix points to its deal with The Weinstein Company for an exclusive theatrical window just after Weinstein movie Pay TV windows, which will bring these films to Netflix just 12 months from the Pay TV window as opposed to the traditional holdback of nearly eight years. This includes movies like The King's Speech and Blue Valentine and next year it will feature My Week with Marilyn and The Iron Lady. Already it has Thor, Transformers: Dark of the Moon and Immortals.

When it talks about its rivals, Netflix says that it has yet to see Hulu-Plus or Amazon gain meaningful traction in terms of viewing hours, and that Redbox Instant by Verizon will face a big challenge to break into the top 3 subscription services and points more directly at TV Everywhere services, such as Comcast's Xfinity as the real competition, because this service is free if people already subscribe to cable.

Copyright © 2012, Faultline

Faultline is published by Rethink Research, a London-based publishing and consulting firm. This weekly newsletter is an assessment of the impact of the week's events in the world of digital media. Faultline is where media meets technology. Subscription details here.

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