Did Reed Hastings Make a Mistake of Olympic Proportions?

Netflix (Nasdaq: NFLX  ) shares have been setting 52-week lows recently. In the recent second-quarter report, CEO Reed Hastings said that Netflix might not meet its goal of adding 7 million domestic streaming customers this year, and he blamed the London Olympics.

Investors took the "might not" meet subscriber goals warning to mean that Netflix "certainly will not" get anywhere close. And at the end of last week, an independent report from network security vendor Procera Networks showed that Netflix viewing dropped as much as 25% on the first Sunday of the Games. Hence, the shares fell even further.

What's really going on?
Olympic streams -- powered by Comcast (Nasdaq: CMCSA  ) subsidiary NBC, using the massive YouTube platform on the back end -- are indeed finding an audience. At one point, Olympic video traffic sucked up 34% of America's bandwidth usage. However, it seems like viewers are simply setting aside more time for video entertainment during these Games rather than pressing "pause" on Netflix while Michael Phelps goes for another gold.

It seems like Hastings jumped the gun. The company now says that streaming traffic has "dipped very occasionally" during the Olympics. The company endorses the traffic analysis gurus of Sandvine, who found that Netflix streams actually grew during that weekend.

Sandvine spokesman Dan Deeth certainly sees no need for Netflix investors to worry: "While it is too early to tell what impact the full two-week event will have on [Netflix's] traffic levels (the first weekend has few marquee events), we would not be surprised to see the Olympics have little to no impact on Netflix and for their traffic to continue to slowly grow organically, even if it might not be growing as fast as other real-time entertainment applications."

As for the troubling Procera report, the company itself has explained that the 25% drop happened in a very limited market sample. "Streaming levels are back to normal," according to Procera.

Why London isn't crushing Netflix
Netflix and live sports go together like salmon and chocolate syrup. Given the on-demand nature of digital video streams, you rarely lose out on a marathon viewing of Breaking Bad just because the Usain Bolt race is coming up. Just hit pause on Netflix and come back later.

Likewise, even live sports events aren't necessarily "live" anymore. Digital video recorders in the TiVo (Nasdaq: TIVO  ) mold make it easy to record live broadcasts for later viewing. You can also pause the 100-meter finals right before the starting gun to grill up another batch of burgers.

And don't even get me started on NBC's decision to tape-delay many crucial events, removing the element of surprise as results often become available online hours before hitting the TV screen. NBC will declare the Olympics as a great success, but it's a far cry from perfection.

The Foolish takeaway
The technological entertainment landscape has certainly changed since the Vancouver Winter Olympics, which "had a small negative effect" as far as management could tell. Maybe the prevalence of DVRs dampened the Olympic impact on Netflix and other casual entertainment providers. If so, Hastings should send a thank-you card to TiVo when he hits that magic 7 million new subscribers mark.

Hastings erred on the side of caution this time -- like so many times before. The stock will jump back when it becomes obvious that the Olympics didn't kill Netflix.

Learn more about Netflix in this brand-new premium report. Our top analysts sat down to describe all the opportunities and risks ahead of the movie maven, and laid it out in plain English for you. The report even comes with a full year of updates as Hastings steers his company through uncharted waters. Click here to get started.

Fool contributor Anders Bylund owns shares in Netflix and has created a bull call spread on that stock as well, but holds no other position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of Netflix. Motley Fool newsletter services have recommended buying shares of Netflix. The Motley Fool has a disclosure policy.

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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 August 06, 2012, at 6:32 PM, Viking70 wrote:

    Anders,

    The point is not whether or not traffic/usage is up or down, although there has been a lot of 'noise' on this issue. We saw from June's billion hours watched number than traffic/usage does not translate into the more important metric--new subscribers. The concern is that 3 months after stating that 7 million new subscribers was the projection foe 2012, NFLX guided to a possible miss on subscriber numbers based on no new app and the Olympics, both of which should not have been a surprise to Reed and his cohorts. It is unlikely that the Olympics will be reason for folks to cancel membership so negative subscriber numbers are very unlikely. On the other hand, making excuses for a subscriber possible miss just three months after setting the 7M new subscriber expectation is disconcerting. At best, bad PR/forecasting. At worst, it might be symptomatic of bigger or more serious problems. As a shareholder, I think the stock price haircut is overdone, but I can also understand why people bailed.

  • Report this Comment On August 07, 2012, at 4:12 PM, AceInMySleeve wrote:

    The olympic streaming data helps to explain the stock action below 60 (analysis in this article), but not the larger fall immediately following earnings (which is your analysis).

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