Why Netflix Keeps Apologizing

The company with the little red envelopes faces serious challenges — and losses — as it switches from mailing DVDs to streaming content online.
David RosenbaumApril 24, 2012

“I messed up,” Netflix co-founder and CEO Reed Hastings wrote in a September 2011 blog, apologizing for the company’s July announcement that it would cleave its video-streaming business off from its DVD-by-mail service and charge customers separately for each, amounting to an abrupt, not to mention awkwardly revealed, 60% price hike for Netflix customers who wanted both. A few months after that announcement, and despite Hastings’s apology, Netflix had lost more than 800,000 subscribers and, as yesterday’s first-quarter earnings call illustrated, the company is still suffering from the fallout.

On Monday Netflix CFO David Wells reported that the company had experienced a net loss of $4.6 million as domestic revenue fell $21 million from the fourth quarter of 2011. Global revenue also fell. Wells attributed the loss in part to Netflix’s overseas investments as it tries to expand into Europe with, he said, a good deal of success in the United Kingdom and Ireland, and somewhat less success in Latin America.

The good news for Netflix is that it’s adding streaming subscribers in the United States 1.7 million in the quarter bringing the total number to 23.4 million, just slightly fewer than it had in the second quarter of 2011 before its troubles began. Further, Netflix is wisely recognizing that the days of the DVD are numbered, and is attempting to re-engineer its business in preparation for the inevitable day when the last DVD is pressed.  

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And true, the company fixed a broken business model: the video rental store with its long lines, frequent stock-outs, and punitive late fees. Nevertheless, it is moving to a model characterized today by rapid growth in content development, relentless innovation in the devices on which that content is viewed, and fierce competition in both content development and content delivery from huge enterprises. The competitors include Apple (iTunes), Amazon (streaming and shipping DVDs), Comcast (Streampix and Xfinity On Demand), Google (investing heavily in developing original content for its new and proliferating YouTube channels), Hulu (a joint venture of NBC, Fox, and Disney), and Time Warner (HBO streaming), to name a few.

Wells cautioned that although Netflix “needs to grow investment in content aggressively,” the level of that investment will track lower than revenue growth, and will be determined by “cost-per-hours-viewed.” Analysts agree that Netflix’s library of streaming content is relatively weak. Hastings admitted, somewhat defensively, that Netflix will not soon become a broad provider of exclusive original programming. “Lots of middlemen are hugely successful, and sometimes they verticalize and have store brands, and they do that to strengthen themselves. HBO started with content produced by others. We’re comfortable as an aggregator,” he said.

Whether investors are as comfortable is the key question. At 11 this morning, Netflix was down 13% from its previous close.

There’s no question that Netflix took a reputational hit with the way it handled its price increase, as Hastings admitted yesterday. “Brand recovery is mostly there,” he said. “We’re conscious that it’s tender and we have to be extremely diligent and tender as we build back our reputation.”

And when asked what Netflix might do if Amazon beats its $7.99 per month streaming fee, Hastings quickly said he felt “great” about its price and anticipated no changes.

After last summer’s follies, the one move Netflix no longer has available to it is touching its price in any way at all.

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