Netflix: Crashing off the couch

 

Netflix (NFLX) has taken the kind of beating that would make a boxing fan proud in the past few weeks. The price plunged 14% in after-hours trading after its most recent quarterly statements. The company is struggling to meet its earnings projections, and added about a million fewer subscribers than it projected. How can one of the titans of streaming entertainment be stumbling in an era where more and more consumers are cutting the cord?

 

The short answer is that prices are going up. Netflix upset many long-time subscribers by announcing plans to “ungrandfather” accounts which had previously been locked in at lower rates. It’s losing subscribers at a pivotal moment in its company history, too. The company recently expanded its service to 130 new countries, and it continues to invest heavily in new intellectual properties. Spending $100 million for two seasons of House of Cards makes sense when the subscriber base is happy and growing. When that membership starts to decline, though, those investments in the long-term future look short-sighted.

 

This ungrandfathering may have been a sign of things to come. If membership growth continues to slow, the company will be forced to raise prices higher. This will put an increasing crunch on membership numbers, and something will have to give. Either Netflix will have to stop spending on its principal draws, its original content, or find some equilibrium with its membership over fees.

 

Another market pressure harming Netflix is the increase in competition. For many years, Netflix was the biggest game in town for streaming video. Consumers were either watching TV or Netflix. Now, Netflix sits in a crowded field. Alternatives like HBO Go, Youtube Red, and Hulu have put Netflix squarely in the middle. HBO has more original content, Hulu is less expensive, and Youtube Red includes a bevy of peripheral features. While Netflix has been trying to position themselves as the HBO of streaming, many companies have stepped in to become the Netflix of streaming.

 

The lesson of Netflix is to always make sure your footing is firm before you leap. Netflix invested millions of dollars into its infrastructure and content, thinking its income base was secure in the interim. That turned out not to be the case, and now the company has to make a decision. Do they retreat from their expansion plans, cut their losses, and rebuild a relationship with their existing audience? Or do they continue their push for broader success, hoping none of their upstart rivals fills the gap they’ve left behind?

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