Netflix Pain, Pleasure For Competitors (NFLX, AMZN, WMT, AAPL, BBY, DISH, CSTR)

The first votes are in on the pricing scheme introduced in July by Netflix, Inc. (NASDAQ: NFLX) and it appears that the company’s subscribers are voting with their feet. Netflix now expects to claim 2.2 million subscribers for its DVD-only service in the third quarter, down from a forecast of 3 million. Streaming-only customers will also fall from a previous projection of 10 million to 9.8 million. What the company can do to stop the bleeding has got to be its first concern.

Competition from (NASDAQ: AMZN), Wal-Mart Stores, Inc. (NYSE: WMT), Apple Inc. (NASDAQ: AAPL), Best Buy Co. Inc. (NYSE: BBY), Dish Network Corp. (NASDAQ: DISH), and Coinstar Inc. (NASDAQ: CSTR) is heating up and Netflix has run afoul of the movie and television producers that are eager to trim the company’s sails. Netflix is also going into the content production business, further angering the movie studios. In other words, the company is getting hit from both customers and suppliers.

It’s almost a toss-up at which problem the company should attack first. In order to keep its customers, it probably has to offer more timely and better content. In order to do that, it will certainly have to pay more to the producers. Netflix’s foray into production is not a long-term option.

In its announcement of subscriber losses, Netflix noted that it was not changing its financial forecast for the third quarter. That means that its 60% price hike is not costing it money. The trick for Netflix is to convert that partial financial success into a formula that will grow its subscribers and, at the same time, its revenue.

With so many options now available, from Coinstar’s Redbox rental machines to Walmart’s iPad app for streaming rentals and Vudu, Netflix will have to battle for every subscriber. To win, the company needs to offer more than any competitor and more than it now does.

Subscribers currently don’t see the added value for the higher price, and who can blame them. The number of streaming movies available from Netflix is not growing fast enough to keep streaming-only customers happy, and the DVD-only customers have to wait longer for new releases because the production companies have forced Netflix to wait. Offering less service for more money is a sure loser.

Amazon has folded its streaming-only service into its Amazon Prime program and Wal-Mart offers some streaming movies for just $1 each. Redbox rentals are still only a buck and customers don’t have to subscribe to anything. Because the content is essentially the same for every DVD or streaming service, Netflix needs to figure out a way to make its two offerings unique and attractive. And facing resistance, if not downright hostility, from the studios doesn’t make the challenge any easier to meet.

There’s an old saying that if something were easy, everybody would be doing it. Amazon, Walmart, and the rest have done the easy bit by pricing their offerings very low. For Netflix to prosper, it needs to do the harder bit — offer its customers something they can’t get anywhere else at a competitive price. Until the company does that, its growth will remain a serious concern.

Netflix shares are down nearly -14% at mid-day, at $179.96, back up slightly from an earlier deficit of -16%. The stock’s 52-week range is $140.02-$304.79.

Paul Ausick

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