Netflix: Consumers Forgive Faster Than Wall St.

Netflix (NASDAQ: NFLX) added 220,000 subscribers who stream content, reaching a total of 21.67 million at the end of the year. Many customers appear to have forgotten the price increase in September. Wall St. believed that Netflix could lose more than a million customers by year’s end. The company’s share price quickly dropped from $270 to less than $90 because of the backlash against the price increase. But customers have forgiven Netflix faster than Wall St. has, or will in the near future.

Netflix announced that it made $41 million on revenue of $876 million in the fourth quarter. Each of the numbers was higher than expected. Estimates were based on an exodus of customers away from the Netflix streaming service.

It is impossible to say why customer reactions were not as severe as expected. It could be that the new $7.99 price point is still considered reasonable. It could be that people dropped the DVD-by-mail service to save money. It could be that the Netflix product is considered better than most other VOD-like services offered by cable and other streaming vendors. Whatever the reason, there are no longer tens of thousands of protestors on message boards savaging Netflix for its new price points.

Wall St. has not been so forgiving. True, Netflix earnings moved the company’s stock higher by 13% to nearly $100. And some analysts increased their price targets to $125 or $150. But that is nowhere near its 52-week high of $304, a price that the stock may never reach again.

What Wall St. does not like about Netflix is twofold, and neither of the reasons mean anything to consumers. The first is that investors do not like a company that takes the kind of risks that Netflix did when it raised prices, particularly so quickly. It is, from a financial point of view, irresponsible. The other criticism is that Netflix has been unable to keep the costs of its content acquisition low. The service has become so popular that Hollywood wants higher prices for the shows and movies that Netflix offers.

Netflix can fix the first problem, but not the second. Price increases to customers can be more gradual, although that could hurt margins. Netflix management cannot help it if studios want more money because the video rental company is so successful.

The only way that Netflix will overcome the skepticism of investors is if subscriber numbers continue to increase rapidly and revenue grows at rate quick enough to offset content costs. That is happening for now. If it continues to, Wall St. will almost be forced to put investment dollars back into the stock.

Douglas A. McIntyre