I have something to get off my chest. I've been a Netflix
My faith persevered through pricing wars. My confidence was resilient through the premature threat of Amazon.com
However, something happened earlier this year that spooked the bejeezus out of me. For a brief moment in time, it seemed as if I knew the company better than CEO Reed Hastings himself.
Let me take you back to late March. Hastings seemed overly cocky in a Wall Street Journal interview. He held firm to his company's forecast that called for "around" 2 million net subscriber additions this year. He also pointed out how rival Blockbuster
"The amazing thing is that that's 4 million net additions total," he said at the time. "The market is growing that fast."
I didn't buy it.
"Maybe Netflix gets its 2 million," I wrote a few days later. "Maybe Blockbuster does. I just don't think that both will be able to do so. One will grow at the expense of the other."
It felt too much like XM Satellite Radio
Netflix didn't even wait that long to prove me right. It blinked just two weeks later. It now expects to tack on between 1 million to 1.5 million net member additions in 2007. It's one of the few times in my life that it pained me to be right.
I'm no psychic. I'm no dot-com whisperer or Reed Reader. I just call 'em as I see 'em, and I'm legitimately worried about how Netflix will define itself over the next several years.
Jeers for fears
I'll do Alyce a solid and flesh out my fears in bullet points.
- Subscriber acquisition costs are rising.
- Churn rates are inching higher.
- The current quarter may show flat -- or declining -- sequential net subscriber growth for the first time in Netflix history.
- The DVD-by-mail market is smaller than many believe.
- Digital delivery is closer to mainstream reality than many believe.
- Blockbuster's Total Access program is a compelling value proposition.
- The "clip culture" revolution will eat away at our video consumption time and devalue monthly smorgasbord models.
- This week's bump in postal rates will add about $0.20 to $0.25 a month in overhead per account, and Netflix doesn't have the flexibility to hike rates to offset the move, given a pesky Blockbuster.
Where will Netflix turn for growth? It's unlikely to be a leader in digital delivery. Yes, it's there already, but it has every incentive to lay a box of nails on the migratory road that will level the playing field, if not hand the leadership to online portals and cable providers. Why else would it have watched as Amazon Unbox brokered a deal for rental delivery through its former buddy TiVo's
Wall Street is lowering profit targets for this year, as well as 2008, but they may still be too high.
Netflix has been a darling over the past few years, promising convenience. What's the going price for uncertainty when you start to deliver headaches instead?
I'm sorry, Netflix. It's refreshing to take a load off my chest, but I'm stumped as to how you're going to get that monkey off your back.
Think you're done? You're not!
Netflix, TiVo, and Amazon are Motley Fool Stock Advisor recommendations. XM is a former pick of the Rule Breakers newsletter service. Free 30-day trial subscriptions are available to check either service out.
Longtime Fool contributor Rick Munarriz has been a subscriber and shareholder in Netflix since 2002. He also owns shares in TiVo. He is also a member of the Rule Breakers analytical team, seeking out the next great growth stock early in its defiance. The Fool has a disclosure policy.