You're never going to please everybody, especially if you're a public company.

Wall Street darling Netflix (NASDAQ:NFLX) has a new heckler as of Friday morning. Credit Suisse analyst John Blackledge initiated coverage on the DVD-rental giant with an "underperform" rating. He's dusting off a $31 price target for the stock, well below where it's currently perched.

I've been a Netflix subscriber and shareholder for a long time -- since 2002 on both counts -- so I may be biased. However, I've still been critical of the company when I had to be. I can still take a few steps back and approach the stock as objectively as possible.

So with that in mind, I say ... what's Blackledge's beef?

"NFLX's digital streaming content is free for subscribers, resulting in a new layer of fixed costs, without boosting revenue," he writes, as recounted this morning by Barron's tech columnist Eric Savitz. "In many cases, NFLX is paying content owners twice for the same content."

Blackledge is right. Netflix doesn't charge extra for members on disc plans to stream more than 12,000 of its digitally available titles. That decision costs Netflix money, since it has typically negotiated a flat fee with the content creators to stream their flicks, and that's before we get into the actual streaming costs themselves.

Still, that doesn't mean that the decision has been bad for the company's bottom line. There are a few things that our analyst needs to consider.

  • If free streaming is a retention tool, then obviously it reduces churn. That's important, since Netflix is averaging $25.79 in acquisition costs for every gross subscriber added to its rolls.
  • Serving up a title digitally is considerably cheaper than flipping for postage and packaging costs. If a consumer will go through fewer physical discs in any given month because he or she is streaming instead, margins will improve.
  • Offering streaming as a bonus has made Netflix a popular partner for convergence appliances such as TiVo's (NASDAQ:TIVO) DVR and Microsoft's (NASDAQ:MSFT) Xbox 360. Those companies can move more set-top devices under the promise of streams at no additional costs for Netflix subscribers.

We don't have a lot of clarity on these upbeat assumptions. Churn, for instance, has not gone down. However, Netflix is also a very easy service to cancel during an economic downturn. The bullish counterargument is that Netflix closed out its latest quarter with 920,000 more subscribers than it had three months ago. This comes at a time when many entertainment subscription services, including DISH Network (NASDAQ:DISH), Sirius XM Radio (NASDAQ:SIRI), and even TiVo, went the other direction.

Another bullish point is that streaming doesn't appear to be hurting Netflix's margins. The company has been offering this service for more than two years, and earnings continue to grow more quickly than revenue.

Netflix has also blown past Wall Street's profit targets in each of the four past quarters. Analysts are either overestimating the costs to run the streaming service or underestimating the company's ability to make up the difference elsewhere.

Either way, being a Netflix bear on the basis of its popular streaming service is pretty baseless.

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