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You've Come a Long Way, Netflix

Rick Aristotle Munarriz
July 7, 2012

Netflix (Nasdaq: NFLX  ) has kicked off July in fine fashion.

Fueled by a bullish Citigroup analyst note and a big streaming milestone, shares of the leading video-service provider posted almost a 20% increase during the holiday-shortened trading week.

Then again, a Netflix rally in July is nothing new. It was last summer when the stock hit an all-time high of $304.79. Investors have suffered brutal losses since then, even with this past week's rally.

The market underestimated consumer displeasure with Netflix last summer. Is the same market underestimating consumer satisfaction this time around?

A tale of two summers
Friday will mark the one-year anniversary of when Netflix's stock briefly poked its head above the $300 mark.

How many market watchers remember the catalyst that propelled the stock to its all-time high last summer? You probably won't believe it, but Mr. Market has a funny way of whitewashing the past. See, the day before Netflix peaked, the company announced that it would stop offering unlimited streaming at no additional cost to subscribers of its unlimited disc-based service.

The market applauded the move. By charging $7.99 a month for streaming while shaving $2 a month off the price of its unlimited DVD plans -- the company was essentially pushing through a price increase of as much as 60%.

Subscribers were furious. Analysts were giddy.

"Netflix's decision is brazen, but not as bright as it -- and some bullish analysts -- think it may be," I argued later in the week in an article ominously titled "What If Netflix Is Wrong?" But that argument fell largely on deaf ears.

How could analysts dismiss the displeasure of the very people Netflix needed to push the new pricing through? Goldman Sachs analyst Ingrid Chung figured most of Netflix's subscribers would stay put. Any churn would take place at the entry level, and folks on pricier multi-disc plans would just absorb the $6-a-month hit. Piper Jaffray's Michael Olson and Merrill Lynch's Nat Schindler argued that this would accelerate the migration to Netflix's streaming service, but the bullish analysts failed to consider that the price increase could actually lower average revenue per user as longtime customers cancelled the disc-based service.

They obviously couldn't see the Qwikster fiasco that would roll out later in the summer, but they also missed the likelihood of an uptick in churn and the implosion of Netflix's brand and reputation.

Summer of love
The roles are reversed this summer. Consumers can't seem to get enough of Netflix's streaming service, as usage clocked in at a record of more than a billion hours of served video last month. However, the stock has shed more than 70% of its value over the past year.

Analysts and investors are skeptical, but that skepticism comes a year too late. Consumers have not only forgiven Netflix for last summer's woes, but the service's 26.5 million streaming customers -- and nearly 29 million overall subscribers -- have also forgotten all about it.

The disconnect is ridiculous, really.

The market freaked out when Liberty Media (Nasdaq: LMCA  ) revealed that Starz w