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The S.S. Netflix is taking on water.
Shares of Netflix (Nasdaq: NFLX ) sank after posting disappointing quarterly results. Between the lackluster subscriber growth outlook and more mailer-red ink on the horizon, it's hard for investors to sit through this painful screening.
However, you've probably had your fill of Netflix negativity. Let's take a look at a few things that CEO Reed Hastings could say that would make things better.
1. "We will no longer sacrifice near-term profitability for the sake of international expansion."
One of the sticking points in Netflix's report is that it may crank out a small profit during the current quarter, but it's warning of a small deficit during the fourth quarter.
The culprit would be the company's push into a new European country later this year.
Sure, it makes sense to expand internationally. There aren't too many companies doing this right, giving Netflix the mother of all land-grab opportunities. After lining up enough Spanish and Portuguese content for its Latin American rollout, hitting up Spain or Portugal is completely logical.
However, investors didn't appreciate the quarterly loss that Netflix incurred when it threw itself into Ireland and the U.K. several months ago.
Citigroup analyst Mark Mahaney issued a bullish note earlier this month, arguing that Netflix was trading for just 12 times the profitability of its domestic operations. International losses are blurring the fundamental strength in the company's stateside business.
It may be great to see Netflix build up its international business to 3.6 million subscribers in two years, but give investors the fiscal responsibility that they expect. Make it clear that this will be the last international expansion that sinks Netflix into the red. If not, investors will never trust quarterly profitability as being sustainable. The stock will continue to be held back in fear of the next international hit.
2. "Our DVD-based business may not decline every quarter."
One of the more shocking admissions by the company is that disc rentals are on a downward spiral.
"We expect DVD subscribers to decline steadily, every quarter, forever," Hastings told an analyst during January's conference call.
We all know that this is a niche in decline -- especially since Netflix is practically abandoning its flagship specialty -- but every quarter?
The numbers are certainly bearing that out. Since peaking at nearly 15 million last summer, Netflix has shed roughly 10% of its DVD subscribers every passing quarter. Yes, it's that bad. Netflix shed 850,000 disc-based customers during the past three months alone.
It's easy to blame the fading popularity of the optical disc for the slide to just 9.2 million DVD accounts, but why is Coinstar's (Nasdaq: CSTR ) Redbox still growing?
There's a market worth cultivating here. Coinstar and DISH Network's (Nasdaq: DISH ) Blockbuster are still around because they have gone on to add video games as they opportunistically take advantage of fallen rivals. It may seem to be too late for Netflix to add video games the way it briefly promised during last summer's Qwikster fiasco, but that would be one way to retain customers who are getting more physical-media variety eslewhere.
3. "$7.99 a month is the floor -- and not the ceiling -- of what Netflix is capable of acheiving."
Netflix closed out the second quarter with a whopping 30.1 million subscribers. That's a great number. Netflix has more subscribers than any satellite-television or cable provider. It has also surpassed Time Warner's (NYSE: TWX ) HBO to become the top premium subscription channel.
The problem is that more than two-thirds of those subscribers are paying the company just $7.99 a month for its streaming service. There's little upside to that in the model. It's not like the old days, when folks would upgrade to multi-disc plans costing more than $20, or when the company would sell previously viewed DVDs to members.
Netflix needs to change that perception.
One way would be to offer a la carte digital rentals of new releases. I've been hammering this point for months, and it continues to make sense.
Amazon.com (Nasdaq: AMZN ) and Blockbuster already offer this in addition to the older titles that are part of their streaming catalogs, but they have to gain traction. Amazon is still too behind in terms of appliances that stream Amazon's digital video, and Blockbuster's streaming service is available only to DISH Network customers. Netflix has a real shot to make a difference here, whether it teams up with Apple's (Nasdaq: AAPL ) iTunes or rolls out its own platform.
Netflix's stock will never approach last summer's all-time highs as long as the model is perceived to be capped in terms of average revenue per user. The addressable market and $7.99 a month will only take Netflix so far, and it's time to get excited about the ceiling rather than stare at the floor.
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