If you were wondering whether Netflix's (NFLX -9.09%) service outage on Christmas Eve was a social experiment, it was not. I asked. Rather, I was informed that "according to the terms of service, there is no guarantee that the service will be available without interruption." When I asked if the representative could tell me what the company might do for me, or when the service might be restored, I was told that she had no further information but that I should refrain from calling back as hold times were very high.
Now, I am a friendly person, and very much possessed of the holiday spirit, but as a potential investor, I am very concerned. When options like Amazon.com's (AMZN -2.56%) Prime and Redbox Instant -- the joint venture between Coinstar (OUTR) and Verizon (VZ 0.90%) -- are becoming serious alternatives, it continues to grow increasingly more difficult to remain a Netflix customer, let alone an investor. Let's explore the prospects for how the company will perform in the year ahead.
Amazon to blame?
According to Netflix, as reported by the Associated Press, the outage was caused by "some of Amazon's cloud infrastructure." The division of Amazon responsible is the company's Amazon Web Services (AWS) group that focuses on providing both server time and data storage to various other businesses. While the company has not released specific figures for this piece of its business, estimates locate annual revenue at around $1 billion. Forward-looking analysis suggests that there is significant upside possible. Andrew R. Jassy, head of AWS, told The New York Times, "We believe at the highest level that A.W.S. can be at least as big as our other businesses." Amazon made around $50 billion in revenue last year, making the AWS division responsible for a mere 2% of revenues; if the division grows as large as Jassy believes, that would represent a fiftyfold increase. He also told the Times that he believes that AWS is less than 10% of its eventual size, so the expected growth, while not well defined, is significant.
The two companies are supposedly working together to prevent a recurrence of the problem, whose impact a Netflix spokesperson is quoted as saying was felt "across the Americas." It seems that at a time during which competition is rising, however, Netflix would have planned more thoroughly, or at least planned a better message to the public. The company's Twitter posting simply read, "We're sorry for the Christmas Eve outage. Terrible timing! Engineers are working on it now. Stay tuned to @Netflixhelps for updates."
The competition
In addition to Amazon Prime, Redbox Instant, once it is released, is likely to be one of the biggest threats to Netflix. One of the hallmarks of the new service will be the ability to seamlessly switch from streaming to physical DVD options; both are included in most packages. While the bulk of Netflix customers opt for streaming alone, the availability of certain new releases on disk before they become available as streaming options should give the new service a competitive advantage. While there were hopes that service might be rolled out in time for the holiday season, the release was delayed until early next year.
Netflix and Disney
Despite Netflix's loss of exclusivity on a wide variety of content, the company was recently able to negotiate a favorable deal with Disney (DIS 0.16%) for content delivery. Netflix's Chief Content Officer Ted Sarandos spoke highly of the deal: "Disney and Netflix have shared a long and mutually beneficial relationship and this deal will bring to our subscribers, in the first pay TV window, some of the highest-quality, most imaginative family films being made today." The deal has various favorable terms for Disney, but the cost to Netflix continues to be a concern.
As you can see from the chart below, the stock -- once a market darling -- is up nearly 70% in the past three months. This performance has only been possible because of the precipitous drops the stock has had ever since it messed with its pricing and spooked investors. This poor choice was followed by many more, leading the stock progressively lower, appearing to bottom in the low-$50 range. While the stock is back above $90 now, the quality of the content Netflix produces doesn't really matter if nobody can watch it.
While every company stumbles at one point or another, and there is clearly a solid argument for the outage being Amazon's fault, Netflix's message was not a good one. The best news for the company may be that the market had time to analyze, forgive, and forget before the bell rang on Wednesday. I remain unconvinced about Netflix's future and would avoid the stock heading into 2013.
