What Made Netflix Reconsider This Decision?

About two years ago, Netflix (Nasdaq: NFLX  ) stopped selling ad space in those iconic red mailers. The revenue was "inconsequential" anyway, so CEO Reed Hastings diverted that marketing space mostly to promotion of the then-new streaming service instead.

But that's changing again. The last Netflix envelope I got contained a full-color ad for Sharp television sets, with nary a mention of Netflix or Qwikster. Sure, the ad mentions that the TV sets have built-in network connections and "over 100 apps," but stops short of saying that Netflix would be among them.

So what does this mean? Did mailer ads become a viable revenue source again? Is the company getting ready to split off Qwikster with some new ad policies in place? Maybe the streaming service graduated from the need to blare its availability from every available channel?

Pending word from the company itself, I'm thinking it's a combination of all three. When the third-party ads dried up in the spring of 2009, Netflix had just over 10 million subscribers, most of them unfamiliar with digital video streams. Now, about 22 million out of the company's 24 million customers have made the explicit choice to pay for digital streams. Preaching to the choir in order to convert the last 2.2 million foot-draggers seems pointless. Under these circumstances, the ad revenue doesn't have to be huge in order to make sense.

Now, my ears would perk up if we started seeing in-mailer ads for Amazon.com (Nasdaq: AMZN  ) , Microsoft (Nasdaq: MSFT  ) , or Apple (Nasdaq: AAPL  ) -- all of whom have been pointed out as potential buyers of the whole Netflix bundle or at least the DVD-mailing arm now known as Qwikster. In that case, some kind of deal might be imminent.

Given that Qwikster will start shipping video games soon enough, I'd expect to see industry players including Sony (NYSE: SNE  ) and Activision Blizzard (Nasdaq: ATVI  ) buying ad space here. And Microsoft could run Xbox-related ads here without triggering my takeover alarm bells.

Does the all-new Netflix creep you out, or is it the screaming buy of the century at today's low prices? Add the company to your Foolish watchlist to stay on top of the heavy flow of Netflix news and analysis.

Fool contributor Anders Bylund owns shares of Netflix -- very carefully -- but holds no other position in any of the companies discussed here. The Motley Fool owns shares of Activision Blizzard, Apple, and Microsoft. The Fool owns shares of and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Apple, Amazon.com, Activision Blizzard, Microsoft, and Netflix. Motley Fool newsletter services have recommended creating a synthetic long position in Activision Blizzard, a bear put spread position in Netflix, and a bull call spread position in Apple and Microsoft. 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 (9) | Recommend This Article (4)

Comments from our Foolish Readers

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 October 03, 2011, at 5:02 PM, Rdsunder wrote:

    This could be for both good and bad reasons. The bad reason could simply be that they need the revenue and are out shaking every conceivable tree to get it. If they start putting Supercuts coupons there, this could be the reason.

    The good reason is this: The point of the separation between Qwikster and Netflix was to enable each management team to make the best possible decisions for the betterment of its individual business, w/o being bogged down by "greater good" types of questions (such as using the ad space to advertise the streaming service).

    Getting more revenue in to Qwikster through advertising Samsung (or whoever else) is a way for the Qwikster business to grow its top-line and pay for its considerable opex w/o having to wonder about how the rest of the business is feeling. That was the point of the deal. If they want, they should ideally be able to advertise Amazon.com's video streaming, for the right price, of course.

  • Report this Comment On October 03, 2011, at 5:39 PM, mattack2 wrote:

    What a very misleading headline! I thought this was going to be about netflix reconsidering splitting off into netflix & qwikster.

  • Report this Comment On October 03, 2011, at 5:44 PM, mattack2 wrote:

    Also, it's insulting to call those of us who *CHOOSE* DVDs over streaming "foot-draggers".

    I cancelled streaming when my price was going to go (way) up, and went to a (fewer) DVD-only plan.

    I was very strongly considering toggling between more DVDs and fewer DVDs+streaming some months, but with the split of the web sites, that won't happen for me for a long time.

  • Report this Comment On October 03, 2011, at 6:11 PM, TMFZahrim wrote:

    This just in from Netflix VP of Corporate Communications Steve Swasey:

    "This incident is residual of an old practice."

    In other words, Netflix is not getting back into high-volume ad space at this time. I still think it's a pretty good idea, though.

    Anders

  • Report this Comment On October 03, 2011, at 6:15 PM, nhalden wrote:

    It's simple really....they sold the streaming service once they decided to make a go at it. Now that they split the DVD service is selling "space" again. Why not...it's a separate company with a separate P&L. Qwickster is NOT Netflx the sooner everyone come to grips with that the sooner the stock will right itself.

    I believe that both NF and QS will have their own stock symbol once the split is complete.

    SO YEAH they need the revenue.

  • Report this Comment On October 03, 2011, at 7:40 PM, xmmj wrote:

    Problem is, NETFLIX shot themselves in the foot - 2 times!

    Explained at:

    http://bit.ly/o3SdfG/

  • Report this Comment On October 03, 2011, at 9:39 PM, Threedollarbill wrote:

    I still think the number of streamers vs. foot draggers is not accurate. Is there somewhere to verify the numbers?

  • Report this Comment On October 04, 2011, at 4:55 AM, TMFZahrim wrote:

    @Threedollarbill, that data is from official, updated management guidance. It should be close to reality given that the guidance was given after the price changes took effect and just two weeks before the end of the quarter. Source document:

    http://files.shareholder.com/downloads/NFLX/1335406340x0x500...

    It's the best number we have until the earnings release, a couple of weeks from now.

    Anders

  • Report this Comment On October 10, 2011, at 2:51 PM, dameyoppa wrote:

    This is why I use Mixvid.net free movies free games free music. you cant beat that!

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