Netflix Isn't Doomed

Despite the recent downward spiral of NFLX, I'd agree that Netflix isn't doomed - it just has to seriously re-evaluate its branding and messaging. Their success as a company will hinge on their success in shifting the meaning of the Netflix brand (Qwickster was clearly one attempt at that).

Netflix is down, but not out, and I wouldn't be surprised to see it bounce back (maybe not to quite the same peak, but still much higher than it is now).

I'm not long on Netflix, and here's why:

1. Netflix is at the mercy of media companies that control the content. Media companies can basically charge whatever they want for their content on Netflix. If Netflix can't afford it, they'll let their contracts expire and people will no longer get to see the movies and shows they want to watch. Unfortunately, the pricing hikes made consumers realize that it was extremely expensive to spend $16 a month to rent 1 DVD a week with streaming, whereas before at $10 they could justify the cost.

2. Netflix is in a crowded market with Amazon, Hulu, Apple, Google, and the media companies themselves. Sooner or later Starz, HBO, Warner Bros, and all these other media companies may decide to start their own version of "Netflix" and cancel all their existing contracts entirely. This would be more profitable for them, and would essentially kill Netflix.

3. Poor customer relations. The Qwikster snafu significantly hurt their brand, and a lot of customers (800k so far) have already left their service. Not only are they going to have to convince their existing customer base to stay, they need to convince more customers to join, as to drive revenue growth.

4. Netflix is predicting that its combined loss of customers and European launch will push it into the red next year where it may stay for all of 2012, according to a letter to its shareholders. http://goo.gl/3VdED

I doubt that anybody 'doubled up' and now pays for both the DVD and streaming option. The reason for the DVD service to exist at all is to do with Hollywood accounting and the way the licenses are counted - the idiocy of this has been discussed here before.

The studios can't start their own streaming service simply because they do not have the branding they think they have. This isn't the 1950s, nobody thinks "I must sign up for MGM's service they have all the best action movies". HBO and BBC might manage to make separate pay-for services but are more likely to simply agree an extra cost deal with Netflix in the same way they sell an extra cost package to cable. Does HBO really want to get into the writing and supporting software player business?

Then the studios have a problem that they are in direct competition to their main customers - the cable companies that would be delivering these shows over IP. Can we say serious throttling?

Sooner or later somebody in Hollywood is going to manage to get the childproof top off their Lithium tablets and realize that iTunes hasn't quite destroyed the music industry.

The problem is content. Netflix doesn't have much in the way of IP for streaming video. Their streaming service has always been lacking, but it used to be the only viable option to watch videos. Starting next year, they'll have even less content, when they lose the rights to all the Starz content.

Netflix took the risk of establishing a new video business model. They proved streaming video works, now will have to compete against a host of future players for content rights. It seems like studios have more to gain by going it alone and cutting out the middle man (netflix).

Netflix has to weather a storm, and hope for some breaks along the way. I see the major studios trying their own thing first. Aggregation might be key, I'm not sure I'd want to have accounts with several movie studios to watch their movies. But I think it will take some time to get to the point where that's obvious to all the major players. It's not clear that Netflix will still be around by then, and even if they are, it's not clear that the studios will find them the most appealing option. It's very possible that the major studios would get together (a la hulu) and cut out Netflix altogether.

Netflix has their brand and their recommendation engine. The brand has taken a hit with all their recent missteps. I'm not sure that their recommendation engine will get them through. It's not trivial to replicate, but can be done.

Look for Netflix to start pumping out quality original content. Just like HBO did. It's one of the best ways for them to stay competitive and differentiate themselves.