Netflix Tumbling Downhill

Not a lot is going Netflix’s way at the moment. Despite meeting analyst expectations last quarter, the company’s disappointing subscriber growth and continued losses projected for the current quarter sent the stock tumbling.
Netflix’s Financials
Netflix’s (NASDAQ:NFLX) Q2 revenues grew 13% over the year to $889 million and were in line with the market’s expectations. EPS for the quarter of $0.11 was significantly ahead of the Street’s target of $0.05 for the quarter. However, earnings fell 90% over the year.

Last month, Netflix announced that its subscribers streamed more than one billion hours of online video content in a single month. But the market remained concerned over slow growth in subscriber base this quarter. During the quarter, Netflix added a mere 530,000 customers to end with 23.94 million streaming viewers in the country. In comparison, a quarter ago, Netflix had added more than 1.74 million customers. Domestic DVD rental memberships also continued to slide and fell by a third to 9.24 million subscribers.

Within overseas markets, Netflix added 555,0000 subscribers to a total of 3.62 million at the end of the quarter. For the current quarter, Netflix projects losses of $6 million to earnings of $8 million. Worryingly, Netflix admitted that it may be challenged to meet its original target of adding 7 million customers by the end 2012.

Intense Competition and Customer Dissatisfaction Troubling Trends
Nearly a year ago, Netflix announced a 60% price hike and a spin-off of its DVD business from the streaming business. Customer response soon forced the company to retract these proposed moves. Despite the corrective action, Netflix’s performance has been wavering.

The company is being cornered by domestic competition which is growing rapidly both in streaming and the DVD rental segment. Recently, Comcast began offering Steampix, a streaming service for TV and video content, currently available to Comcast’s 22 million cable TV subscribers for a fee of $4.99 a month. Analysts believe that while Comcast may not be able to compete with Netflix on content, the digital streaming option will help keep Comcast retain customers who would have otherwise cut the cord in favor of Netflix. Coinstar’s Redbox also entered into an agreement with Verizon to begin supplementing its DVD rental services with a digital streaming option through a new service proposed to be launched by the end of this year.

Netflix is trying to move away from its DVD business. The company was expecting the DVD customer base to continue to shrink during the year. However, it has struggled to compensate this smaller subscriber base with additional revenue sources. Both Redbox and Blockbuster have managed to grow their DVD rental business by adding video game rental to their available offerings. Netflix, however, does not offer any game CDs as part of its rental service.

Netflix’s customers are also not very happy with the service. In a Consumer Reports survey released this weekend, Netflix was found to be the biggest video streaming service, but lacking good customer satisfaction scores. The survey revealed that more than 80% of those viewers who subscribed to a streaming service used Netflix. These customers reported dissatisfaction with the limited selection of movies, especially new ones. Fewer than 20% respondents said they were highly satisfied with their choices of titles available for streaming. Pay-per-view streaming services, including Amazon Instant Video, iTunes, and Vudu, scored better on customer satisfaction. Netflix’s DVD service saw a better result with customers judging them to have a better library.

selection of titles.

The stock market hasn’t been kind to Netflix. The stock is trading at close to 52-week lows of $57.75, with a market capitalization of $3.21 billion. It had reached a 52-week high of $269.50 in August 2011.

Reed Hastings is one of the most respected entrepreneurs of our time. At the helm of a tumbling Netflix, Hastings has his work cut out for him. Is there a turnaround solution in the wings?