Netflix Shares Jump, But Where Will They Land?

Shares of video rental giant Netflix Inc. (NASDAQ: NFLX) are up more than 13% in the early afternoon today following a comment by the company’s CEO that the company for the first time streamed more than 1 billion hours of video in June.

The achievement could be a mixed blessing though, given the company’s all-you-can-eat subscription model. In order to keep from losing customers, Netflix needs to offer more and more programming. That programming is not getting cheaper, either from movie or TV producers, and Netflix’s own program development is not cheap either.

The company is faced with growing its subscriber base enough to absorb all those costs and still show a profit. But as the subscriber count rises, the licensing costs are almost sure to rise as well. At some point, and probably sooner rather than later, Netflix will have to raise is subscription price and continue to grow its subscriber base because the company’s costs are only going to rise.

There’s virtually nothing Netflix can do to reduce its costs short of selling off its DVD rental business and becoming a pure play streaming video company. Potential buyers might be Coinstar, Inc. (NASDAQ: CSTR) or Dish Network Corp. (NASDAQ: DISH), both of which still handle physical DVDs. Netflix could also try to spin off its DVD rental business, but that looks like a non-starter.

Something will have to give pretty soon because streaming video customers won’t support the DVD rental business forever. Netflix’s attempt to split the businesses last year was correct from a business standpoint, but a public relations disaster. Look for them to try the move again.

Netflix shares are trading up 13.2% at $81.56, their highest level in 2 months. The stock’s 52-week range is $60.70-$304.79.

Paul Ausick

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