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Netflix Needs To Improve Streaming Quality

Posted on Monday, Dec 6th 2010

Sandvine’s report on streaming services in the U.S. claims that Netflix (NASDAQ:NFLX) represents more than 20% of downstream traffic during peak times and is heaviest between 8 p.m. and 10 p.m.  The growing popularity of the streaming service is already taking a toll on Netflix’s streaming capabilities, and the service recorded a big outage earlier this quarter. But, despite outages, the company continued to report stellar quarterly performance.

Netflix’s Financials
For Q3, Netflix reported revenues of $553.2 million, beating the market’s projected revenues of $550.9 million and growing 31% over the year. However, EPS of $0.70 was slightly shy of the market’s expectations of $0.71. Netflix ended the quarter with 16.9 million subscribers, recording 13% sequential growth and 52% growth over the year.

For the current quarter, the company projects revenues of $586 million–$598 million with EPS of $0.59–$0.74. They expect to end the year with $2.2 billion revenues with EPS of $2.68–$2.83 and 19.0 million–19.7 million subscribers. The market was expecting EPS of $2.79 for the year and Q4 revenues of $592 million.

Netflix Expanding Streaming Option
During the quarter, Netflix saw significant growth in the number of subscribers watching streamed video. They recorded 66% subscribers using streaming content compared with 61% a quarter ago and 41% a year ago. To cater to this growing trend, Netflix recently launched a streaming-only option for customers priced at $7.99 per month.

They are also looking at spending more for acquisition of streaming content in the coming quarters. Following their $1 billion deal with cable network Epix, they entered into another agreement with FilmDistrict to stream first-run films that would have earlier been licensed to cable channels for broadcast as a pay TV offering. They are also scouting to add more TV episodes and are willing to spend anywhere between $7,000 and $100,000 per episode for hit TV shows while these shows are in season.

Further, to manage the growing outages on their site, the company recently tied up with Level 3 Communications as their primary content delivery network in addition to their existing network agreement with Akamai. But Comcast, which is also negotiating a merger with NBC, has decided to charge Level 3 a recurring fee for carrying video traffic. Level 3 is in a public relations war with Comcast over their decision and has argued that Comcast’s decision will hurt net neutrality. Both Netflix and Level 3 are awaiting the FCC’s decision on the Comcast NBC merger, which will impact video streaming on the Internet.

Growing Competition for Netflix
While traditional movie rental companies like Blockbuster, which filed for bankruptcy in September of this year, no longer pose a threat to Netflix, competition is heating up from other sources. Hulu Plus, for instance, lets users stream Hulu’s content on TVs, iPads, iPhones, and other devices for $7.99 per month and is a preferred choice for a few who would rather watch commercials than be interrupted by buffering outages. Analysts also expect Hulu to file its IPO later this month. Competition is also expected from Google and Apple as they push  Google TV and Apple TV. Google had also announced the launch of YouTube’s movie section, which features over 400 full-feature length movies. For Netflix to beat competition, it needs to ensure a steady stream of good content and a much higher quality streaming experience. And, as of now, the company seems to be on the right path.

Netflix’s stock is trading at $193.42 with a market capitalization of $10.1 billion. It touched a record high of $209.24 earlier last week.

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