Netflix: Trying to Flex

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Netflix understands that the days of fun are over. The third quarter sales and profit forecast of Netflix has missed analysts? estimates by a long shot. The mail-order and online film rental company said that a price increase was the culprit, which was crimping new user signups.

Due to the hike in price, the California based company expects to sign 401,000 new domestic subscribers this quarter. It may seem impressive, but it is a mere fraction of the 1.8 million added in the period just ended. In a statement released by the company, it said that it finished the second quarter with 24.6 million domestic customers.

?Netflix has seen an acceleration in churn for the last two quarters and that trend is only going to get worse with the price increase and the rise in competition,? said Tony Wible, a Janney Montgomery Scott LLC analyst.

Profit this quarter will be 72 cents to $1.07 a share, Netflix said in the statement. Sales will be as much as $828.5 million. Analysts were projecting profit of $1.11 a share on sales of $842.9 million.

Pricing

?The company was successful,? riding the demand wave perfectly, until it decided to change its pricing. To better manage their different services, the company decided to split its mail order and streaming services into two plans, thus raising prices by 60%. ?This move according to many analysts is a foolish one, as the company built itself on the concept of great variety and quality, at a lower price.

?Netflix miscalculated on this one, and are basically saying all our growth is going to be absorbed by people who quit,? said Michael Pachter, an analyst at Wedbush Securities in Los Angeles .?It?s not clear how successful they?re going to be at attracting and retaining people with these new pricing plans.?

Chief Executive Officer Reed Hastings said on a conference call he ?feels bad? some customers are upset. Users of the online service will enjoy ?the amazing new content we will be able to license? with money from the increase, he said.

Streaming

The majority of Netflix?s U.S. customers now purchase the streaming and mail-order plan that Hastings has been trying for the past few months to wean them away from, he said.

We gained some confidence when we launched in Canada, that blew away our expectations,? he said. ?With the strength of streaming only internationally, we got convinced that we can thrive on streaming only.?

Hastings said its DVD-order business was a strong market in the United States, but would not be a strong international product. That?s why the company has tried to shift over to a streaming-only model, he said. That being said, most Netflix subscribers were going for a hybrid subscription that has both mail-order DVD and streaming subscriptions.

?The DVD can last a long time as a successful service if we give it a platform to succeed on,? Hastings said. ?Having it as a division in Netflix, we can measure the P&L, and we think it?ll be a smart investment.?

Profit growth

Second-quarter net income rose 55 percent to $68 million, or $1.26 a share, from $43.5 million, or 80 cents, a year earlier, Netflix said. Analysts predicted $1.12 a share, the average of 27 estimates in a Bloomberg survey.

Sales gained 52 percent to $789 million in the period, compared with analysts? projections of $790.5 million.

The company signed up 1.96 million new users globally, boosting the total to 25.6 million worldwide, according to the statement.

Netflix is expanding its online business to Latin America and the Caribbean this year. Mexico City-based TV Azteca SAB yesterday announced a three-year agreement to supply 1,000 to 1,500 hours of Spanish-language programming annually starting in September.

DreamWorks Animation SKG Inc. is in talks to offer Netflix exclusive streaming rights, replacing a pay-TV accord with HBO, a person with knowledge of the situation said on July 23.

Quit

The MSNBC? Technoblog cites a study by The Diffusion Group of 500 Netflix subscribers that predicts 12-15% of Netflix subscribers will quit the service.

Due to the price increases (i.e. a plan that included both DVDs and streaming went from $10 to $16), TDG found that 44 percent of the report’s participants were likely to cancel their DVD subscription, while keeping streaming; 34 percent would do the opposite. At least in this questionnaire, streaming seems to have the edge.

Those who said they’d ditch Netflix entirely named “a rental kiosk like Redbox” as the number one replacement option (42 percent), while 17 percent were prepared to check out streaming alternatives, such as Hulu Plus and Amazon.

Rivals

Netflix is already in rivalry with Hulu, Redbox and many others . However an already known rival is now more powerful than ever has emerged.

Walmart has launched its video streaming services from the 26th of July 2011.

Walmart bought Vudu 18 months ago and has slowly evolved the business. Vudu, like Netflix, is available on a number of set-top boxes, gaming systems, and media streamers. Users have access to 20,000 titles, including titles the same day they hit DVD, when used on one of these devices. The just-launched service puts Vudu streaming directly on Walmart.com for instant viewing. The Walmart.com service doesn?t seem to have access to the entire library, but there?s still a good chunk available and that might be good enough to make Netflix slow its roll.

This isn?t a subscription service. It?s on-demand with rentals available from $1 to $5.99 and purchases starting at $4.99. That?s the same way Vudu has always worked. Except this time it?s available directly on the website of America?s largest retailer.

Vudu, even with a smaller library, has always been considered the main alternative to Netflix, and now it seems as if Walmart is ready to give it the proper support and placement to make it a true competitor.

Overview

Arabiangazette.com spoke to some users of Netflix in the US,? they were not happy with the price hike by Netflix.? Some said that the company was being top greedy and would loose many more users. Others were more sympathetic, saying that its tough times and to survive they need to raise prices.

In reference to Vudu, we received a mixed response. Some were happy that there is more competition, while others said that they don?t see a difference between the two. According to some Vudu was just another “same like me” company which would not survive for long.

Whatever said and done, both Netflix and Vudu are going to go head to head with each other for new customers. Let the best provider win!

?Source: Bloomberg, TechCrunch, billionairesforbes, hackingnetflix,

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