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NetFlix Posts Good News

January 27, 2012 | Author: Ibex Marketing

In a letter to shareholders about 4th Quarter 2011 results, Netflix CEO Reed Hastings reported good news and bad news. As I read the letter, it looks to me that while the company may have made some very public missteps along the way, there is no question in my mind that the corporate change of direction was a good choice and that it is already paying dividends.

The big news for many people is that the online streaming subscribers now outnumber the DVD-in-the-mail subscribers almost two t0 one. Netflix ended the year with nearly 22 million streaming subscribers and a little more than 11 million DVD subscribers. The DVD users still produce the bulk of the profits, however, $194 million for the quarter compared with just $52 million for the streaming. Still, the company had hoped that streaming would account for as much as 8% of the company profits by the end of last year; it turns out that they exceeded that goal with almost 11% of profits coming from streaming.

Netflix has turned the corner and is not looking back. They see that the days are numbered for DVD rentals; “As expected, DVD members declined this quarter to 11.2 million due to the continued impact of the price changes, as hybrid members continued to predominantly choose a streaming-only plan over a higher priced hybrid plan.” The consumers are voting with their dollars, and moving from disc to broadband delivery. One interesting point is that they see the existing television subscription services as their main competition going forward. “Just as broadcast networks have substantially transformed themselves into cable channels over the last twenty years, both broadcast and cable networks will effectively also become Internet networks like Netflix. As a pure-play we have many advantages, however, just as cable did over broadcast.” Netflix clearly has a strong head start over the others in streaming video, and their commitment to expanding their catalog of content is evidence of their will to compete. They lost the Starz content, but they have already contracted with studios to license many of the same titles directly. And they’re even launching their own original production of content, including a resurrection of the popular series “Arrested Development.”

The company’s future success is anything but guaranteed, but it clearly remains a force to be reckoned with in the market. The transition from in-the-mail to Internet has not been without its bumps, for certain, but Netflix looks strong and will play a role in shaping the future of television.