Netflix Hits New High, New Low

It's the kind of disparity that would make someone see red, if there were red to be seen.

The Netflix (Nasdaq: NFLX  ) website was down for most of the day yesterday, even as its shares were hitting fresh highs. Its existing base of 7.5 million subscribers -- along with anyone curious enough to check out what the leading mail-delivered DVD rental operation has to offer -- found this notice:

Our site is temporarily down. We're working hard to get the site up as soon as possible. Sorry for any inconvenience and thank you for your patience. ... 

Signed by "Your friends at Netflix," the outage fell on the worst day of the week. Monday is when Netflix usually ships out the new weekly releases that hit the market on Tuesday. If a subscriber wanted to rework the queue to make sure the DVD she returned on Friday or Saturday resulted in a new release in her mailbox come Tuesday -- or to watch one of the thousands of films available for online streaming -- it was a fruitless Monday.

Will subscribers bolt in droves?

Of course not. History is actually kind to the purveyors of downtime. There were pronounced outages in the 1990s for Time Warner's (NYSE: TWX  ) AOL and for eBay (Nasdaq: EBAY  ) . They clearly rose above it. Last year's prolific killjoys included Research In Motion's (Nasdaq: RIMM  ) BlackBerry in April, XM Satellite Radio (Nasdaq: XMSR  ) in May, and yes, even Netflix, in July. All of these companies are watching over larger user bases today.

As long as the outage is brief, the downtime is often a model-affirming event, as users realize how much they rely on the befallen services.

Netflix, Netflix, everywhere
Netflix's online experience may not have been running on all cylinders, but that didn't stop the company from making headlines yesterday. Propelling the shares toward new highs was a Piper Jaffray analyst upgrading his near-term price target to $40 from $36 -- fitting given that the stock had lapped that mark heading into the weekend. Insider selling by CEO Reed Hastings, part of a prearranged divestiture trading plan, didn't sway the stock's direction. After the market closed, Reuters reported that surveys were going out to subscribers, gauging the interest in streaming Netflix films through Xbox 360 gaming consoles.

Let's not dismiss the relevance of that last point. Seth Jayson, Tim Beyers, and I have been suggesting for ages that this will happen. Hastings sits on the Microsoft (Nasdaq: MSFT  ) board, so it's safe to say that the two companies have a chummy relationship. Netflix has a proven Web-delivery platform for PCs, and Xbox Live users with hungry hard drives provide Netflix with the last mile to deliver films right to the television set without the need for set-top boxes.

The only real sticking point is pricing. Netflix launched its instant streaming option to subscribers at no additional charge last year. If Netflix subscribers don't have to pay for Xbox 360 digital rentals, it may eat into the paid flicks that Microsoft is hoping to deliver to Xbox Live-tethered gamers. That won't make Mr. Softy happy, unless it markets the availability of "free" rentals for Netflix in a win-win scenario, boosting the user bases for both companies.

Microsoft can surely use that kind of boost. The Xbox 360 has been outsold by its Wii and PS3 competitors in each of the past two months. With Sony (NYSE: SNE  ) winning the Blu-ray battle, and its PS3 systems providing for Blu-ray disc playback, this is the kind of deal that would help give the Xbox leverage in attracting movie buffs who may be swayed by the PS3.

The move would also benefit Netflix, as it gains Xbox Live users who are already used to paying monthly for a subscription service. Game delivery leader Gamefly wouldn't be around if diehard gamers weren't warm to media subscriptions.

So let the headlines shout that Netflix is out. Given the whirlwind of news stories, you know better. Netflix is in, even if it means that investors are seeing green as subscribers fail to see red.

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