Why I'm Not Buying Netflix

Last week the media and fellow Fools couldn't jump up and cheer Netflix (Nasdaq: NFLX  ) earnings report fast enough. A 54% jump in paid subscribers is incredible and analyst estimates were way off the mark. But if we take a look at the per subscriber numbers there are some concerning trends emerging. And Netflix isn't the only company who's pricing power I call into question.

It seems logical that over time Netflix will transition to a similar model as cable providers like Comcast (Nasdaq: CMCSA  ) . They both operate as delivery conduits who license content from content providers. Just like cable operators, over time Netflix will face studios that demand more for their content and hold Netflix hostage. Comparing monthly revenue per customer trends should reveal who holds pricing power.

Revenue per video subscriber

Q1 2010

Q2 2010

Q3 2010

Q4 2010

Netflix $12.90 $12.29 $12.12 $11.64
Comcast $68 $70 $71 n/a

Note: Comcast revenue is for video only.

Notice the falling revenue per paying customer in the fourth quarter showing that despite a rate increase Netflix is getting less from each customer. It appears Netflix doesn't have the pricing power cable providers have.

The trend in monthly profit per customer doesn't look any better, and could come under siege in coming quarters.

Company

Q1 2010

Q2 2010

Q3 2010

Q4 2010

Netflix (gross profit/customer) $4.96 $4.87 $4.57 $4.01
Comcast (operating income/customer) $15.57 $16.50 $15.74 n/a

Note: Comcast operating income uses margin for all cable products.

The falling gross profit per customer in the fourth quarter only includes a small hit from the Disney (NYSE: DIS  ) deal the company signed in December. In 2011 Netflix will also have to renew its Starz deal, and if more streaming content is added, margins could be squeezed further. As customers expect more for less I don't see the trend reversing itself any time soon.

When pricing power doesn't hold up
The revenue per customer trend at Netflix is something Sirius XM (Nasdaq: SIRI  ) may want to consider when it is able to raise prices later this year. Netflix is adding customers at a much faster rate than Sirius with lower cost plans but can't convince people to trade up. Sirius is competing with free or low cost services on mobile phones, so for many of its subscribers a $1-$2 increase could push them away. Subtle rate increases have worked, but if the Netflix model holds true, maybe lower prices are the way to go.

Both Sirius XM and Netflix are really just content delivery companies and as competition heats up for both, the monopoly state they have operated in for the past couple of years will fade away. That is when we will find out how strong their business models really are.

I'm not ready to short a hot stock like Netflix but investors should at least keep an eye on these trends going forward.

More On Multimedia:

Fool contributor Travis Hoium has canceled his Netflix subscription and does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

Walt Disney is a Motley Fool Inside Value pick. Walt Disney and Netflix are Motley Fool Stock Advisor choices. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (13) | Recommend This Article (10)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 31, 2011, at 3:31 PM, kipling7 wrote:

    >there are some concerning trends emerging

    "Concerning" means "relating to". It doesn't mean "causing concern". I think you meant to write "some trends emerging that cause concern".

  • Report this Comment On January 31, 2011, at 3:53 PM, siriuslyrick wrote:

    Given the trend in Sirius subscriptions, the unique delivery model, the fact that Sirius signals are available in numerous areas where mobile phones can't receive a signal, and the fact that Sirius too is delivering over the Internet, it is nonsense to say that "Sirius is competing with free or low cost services on mobile phones."

    When will these Fools stop beating this dead horse?

  • Report this Comment On January 31, 2011, at 4:10 PM, Pandorabelle wrote:

    NFLX has OLD content and can't afford NEW content. The FACT is Netflix is NOT a leader in streaming---regardless of how many times that assertion is put forth. Some behemoth like GOOG or AAPL is going to take NFLX down by under-cutting them for monthly streaming with better content. Count on it. And NFLX will deserve it. And don't think NFLX is an acquisition target either. Why spend $220 per share...or even $50 per share when youcan buy Blockbuster for so much less?

    It's JUST a red button, folks. There's nothing permanent about it.

    Last week-once again-we saw another round in the game of “how vague can we be?” played by NFLX execs at Q4 earnings.

    Why no Guidance offered? It should be obvious to anyone with a brain.

    Because breaking through 25 million subs at their current rate of churn is going to be very hard, and that admission would KILL the stock.

    “Notably, Netflix is NOT providing full-year revenue or subscriber growth guidance, other than that it expects “domestic subscriber net additions to continue to grow in 2011.”

    Well, fancy that! They can "expect" anything. They can "expect" purple elephants to stream next years films through their trunks. Good grief! Pay attention to the very CALCULATED language and theater of these reports. Netflix says it’s doing this because its business is “so dynamic.” Note that they never differentiate the FREE subscriber additions! What a load of crap. The insiders KNOW the PPS will most likely move dynamically DOWN once the smoke clears and the mirrors are cleaned.

    By the way, the Q4 numbers were NOT so great, they were falsely inflated and everyone took the companies word at face value. I want to know why there are no geniuses demanding to know how many of those subs were FREE…and why NFLX has next to no free cash flow? Seems everyone just drinks the koolaid without question!

    Does no one get suspicious to learn that there have been massive buybacks only for NFLX execs to SELL almost all of their interest? Or why, if NFLX is such a great company, they REFUSE to have an open investor call...?

    BEWARE: ANY TIME a company TELLS you that they will NOT report in the future that was a PRIMARY METRIC in the past, is cause for SERIOUS concerns. If it remained good you would have no problem reporting it. Obviously, gross subscriber increases (or decreases) must not look that great, or why refuse to report going forward?

    ***Take note***Refusing to release cost of new subscribers is what the dot-com companies did before the bubble burst. What does that say?

    One last nugget to ponder: how is it that a tech juggernaut like Apple blows out earnings and barely moves, then NFLX spins the numbers - inflated with free subs - and rockets? Are people that stupid?

    It's more likely that this stock is TOTALLY MANIPULATED by institutional interests alligned with insiders. Buybacks only to fund insider selling OF COURSE leaves an empty coffer of free cash flow. The SEC needs to wake up and have a closer look at the books.

    Surely there are more critical analysts that realize everything about Netflix smells fishy. It would be nice to hear someone tell the truth.

  • Report this Comment On January 31, 2011, at 4:23 PM, siriuslyrick wrote:

    Thanks, Sundolly. Perhaps we should be calling it "Netfishstix" or something like that.

    Given the popularity of iTunes, could iMovie be changed/enhanced to become the Netflix killer? It would be all too easy...

  • Report this Comment On January 31, 2011, at 4:38 PM, CCAV wrote:

    As someone who became a Netflix subscriber and having worked at Comcast for more than a decade the consumer's choice trends more towards Netflix than it does Comcast. Comcast's video content and services require one of its video packages and equipment. Netflix uses multiple devices already in the home and requires nothing more than a Broadband connection.

    I agree that Netflix's lag in new titles is a bit long but recently I have seen the gap evaporate with certain studios.

    I pay nearly $200 a month to Comcast for all 3 services and no movie channels. If my kids were not addicted to Disney Channel I could cut the video package loose and simply use my Broardband connection to stream content from Netflix or directly from the Networks I want to see content from.

    These choices are not for all but the traditional methodology of CATV is heading towards extinction as fast as Dial-up and Long Distance Telephone calls.

  • Report this Comment On January 31, 2011, at 4:40 PM, David369 wrote:

    I would expect the revenue per customer to go down as NFLX shifts to streaming instead of DVD by mail. Also, the labor & postage costs go down per customer. So whats the net? Did you figure that out? Maybe the net per customer is going up? Kind of important to know the bottom line, not just all the other "stuff".

  • Report this Comment On January 31, 2011, at 5:56 PM, Pandorabelle wrote:

    Siriuslyrick - I've been calling it "The Netflicker" ! LOL.

    David -

    The long term concern for Netflix is this boost caused by the sudden jump in net (due to more online delivery). You cannot continue to have those conversions or your gross revenue WILL fall.

    Doesn't it bother anyone that following extensive buybacks Reed Hastings sold ALL of his shares? That should be illegal.

    AAPL, GOOG or AMZN could all offer unlimited streaming packages for 4.99 that would KILL NFLX without putting a DENT in their free cash flow. If I were AAPL or GOOG, I would buy Blockbuster on the cheap. Sounds like AMZN is positioning...

  • Report this Comment On January 31, 2011, at 6:02 PM, southernbeachguy wrote:

    I use Sirus everyday and there is no other service as good.

    Netflix is good, but has lots of competition. I just as well rent movies off my DirecTv pay per views.

    I have to have Sirus, don't have to have Netflix.

    That was easy nuff, buy Sirus, it will be the biggest Media Company in a few years.

  • Report this Comment On January 31, 2011, at 6:05 PM, afavorsky wrote:

    The price rise only went into effect in Q1 - so you should not see any effect from that in Q4. I am sure you will see the effect in Q1. That is why their guidance for Q1 is so nice.

  • Report this Comment On January 31, 2011, at 6:43 PM, gdf55 wrote:

    As near as I can tell, there are now only two plans: $7.99/month for streaming, and $9.99/month for streaming plus DVD mailings.

    This is quite a bit simpler than the previous tier of plans, but also somewhat less revenue per subscriber. The implication is that NFLX will need to strongly boost its subscriber base. Granted, subscriber growth looked pretty good in the last earnings report - but doesn't it seem like they need to grow subs by 50% just to keep revenue steady?

  • Report this Comment On January 31, 2011, at 11:41 PM, Smorgasbord1 wrote:

    Actually, Netflix has 9 different plans that include DVDs plus the streaming only plan. The 8 DVD at a time plan is something like $55, or in the low 60s if you add Blu-Ray access.

    I've been a subscriber for a while. Netflix streaming is at best a second-class way to watch movies and TV shows. You can't easily skip back a few seconds if you missed something, like you can with DVR-based cable or satellite (or DVD). Any time you fast foward or rewind, you have to wait while the Netflix device rebuffers. And on my xbox it often pops out of watch mode, requiring reselecting "resume" to continue, with those inherent delays. Depending on the quality of your internet connection, picture quality may suck, or if your connection speed fluctuates, the image quality will also fluctuate, with annoying breaks in the action at each change point. And now Netflix just removed the ability to add movies to your DVD queue from streaming devices, so if you're looking for something to stream but they only have it in DVD, you have to go to your computer to add it to your queue.

    It's still a pretty cheap service to use a supplement to your main viewing options, but there's no way it can be my only entertainment provider. The only people I know who have kept the service are those that really like old movies and/or want to rent movies on high quality blu-ray and are willing to wait a month for new content. Guess that's me, but I can see how someone like DirecTV or Amazon stealing me away from Netflix quite easily.

  • Report this Comment On February 01, 2011, at 2:22 AM, gdf55 wrote:

    Well, I wonder if you mean they HAD 9 different plans. I've been through the exercise of going to their site as a potential new subscriber. The two plans I mentioned are the only ones advertised. There is no DVD-only or multiple-DVD plan listed.

  • Report this Comment On February 01, 2011, at 2:45 PM, Smorgasbord1 wrote:

    Note. They HAVE 9 different plans. They may not advertise them, but they're available. I'm suspecting you either have to call them on the phone, or have an account already and visit your account page to look at upgrade options. I can see the plans available from my account page.

    But, it's clear to me that they're pushing the streaming aspect, not the DVDs. Probably higher margins.

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