Netflix Navigates Changing Dynamics

Netflix’s rapid growth finally seems to have slowed. In the latest quarterly results declared earlier this week, the company announced disappointing growth in the number of subscribers. Subscribers in the U.S. to Netflix’s DVD and streaming services grew by a relatively smaller number of 1.96 million to 24.6 million users, compared with the 3.6 million users added a quarter ago. Growth is projected to slow further in the current quarter. Netflix expects to end the current quarter with a domestic subscriber base of 24.6 million to 25.4 million.

Netflix’s Financials
For Q2, Netflix’s (NASDAQ:NFLX) revenue grew 52% over the year to $789 million compared with the market’s expectations of $790.5 million. EPS of $1.26 was ahead of the market’s target of $1.11. The company ended the quarter with a total of 25.6 million subscribers, with Canada at just under 1 million subscribers.

For the current quarter, Netflix projects revenue of $780 million-$795 million with EPS of $0.72-$1.06. The numbers were significantly short of market expectations of revenues of $846.5 million with EPS of $1.10.

Netflix’s Price Rise
Netflix has been troubled by rising content costs. In the recent quarter, content acquisition costs spending tripled to $613 million. To help address these rising costs, Netflix announced a much-needed price hike. The combo DVD and streaming plan, which was being sold at a monthly subscription of $9.98, is now priced at $15.98. The 60% price hike did not apply to the other DVD-only or streaming-only plans, both of which remained at $7.99 a month.

Customers are, understandably, not too happy with the decision and may be evaluating Netflix’s competitors, which include Hulu, Amazon, and even Google. Hulu is rumored to be up for sale, and with an owner like Google or Apple, it will have access to bigger resources and could become a much more worthy competitor. Further, Amazon’s Prime, which costs $79 a year, also gives users free two-day shipping and discounted one-day shipping on their other purchases. Google’s YouTube is going strong by adding more than 3,000 mainstream movies for rent and is expected to expand the library by offering recent blockbusters, older films, independent movies and foreign films at prices of $0.99-$3.99 for a 24-hour rental. Yesterday, Walmart announced their plans to enable online streaming of DVDs added through their acquisition of VUDU made last year. VUDU has a collection of more than 20,000 titles for purchase or rent and also has streaming services enabled on more than 300 devices. For now, Walmart has not opened a monthly subscription service and users will be expected to rent or buy each title. Finally, Blockbuster is aggressively courting Netflix subscribers with its Total Access program.

In a letter to shareholders, Netflix’s management acknowledged the fear that some subscribers will either cancel or downgrade their plans as a reaction to the price change and thus reduced their outlook for the current quarter. Netflix claims that the price hike will also help them concentrate on their focus area of digital streaming and help reduce their DVD subscription volumes. Initial results reflect similar sentiment among consumers, with 75% of new subscribers opting for the streaming-only option.

Netflix’s Global Expansion
To combat the slowing pace in total subscriber growth and to further their international expansion plans, Netflix recently announced plans to launch in Latin America and the Caribbean. They signed a three-year agreement with broadcaster TV Azteca SAB to use the latter’s programming for a service in 43 countries in the region starting in September. Azteca is Mexico’s second-largest broadcast network and will provide 1,000 to 1,500 hours of content to Netflix.

Additionally, the company is launching their Facebook integration in Canada and Latin America by the end of the current quarter. The feature lets integrates Facebook into their website so that the users can share their viewing habits with their friends. However, they have delayed the launch in the U.S. due to legal uncertainty around video sharing. Within the U.S., the Video Privacy Protection Act, VPAA, is ambiguous about when and how a user can give permission for video sharing. Netflix is waiting on a pending bill in Congress for greater clarification on the act.

Netflix’s stock is trading at $266.91 with a market capitalization of $14.12 billion. It touched an all-time high of $304.79 earlier this month.