Last week the media and fellow Fools couldn't jump up and cheer Netflix (Nasdaq: NFLX) earnings report fast enough. A 54% jump in paid subscribers is incredible and analyst estimates were way off the mark. But if we take a look at the per subscriber numbers there are some concerning trends emerging. And Netflix isn't the only company who's pricing power I call into question.
It seems logical that over time Netflix will transition to a similar model as cable providers like Comcast (Nasdaq: CMCSA). They both operate as delivery conduits who license content from content providers. Just like cable operators, over time Netflix will face studios that demand more for their content and hold Netflix hostage. Comparing monthly revenue per customer trends should reveal who holds pricing power.
|
Revenue per video subscriber |
Q1 2010 |
Q2 2010 |
Q3 2010 |
Q4 2010 |
|---|---|---|---|---|
| Netflix | $12.90 | $12.29 | $12.12 | $11.64 |
| Comcast | $68 | $70 | $71 | n/a |
Note: Comcast revenue is for video only.
Notice the falling revenue per paying customer in the fourth quarter showing that despite a rate increase Netflix is getting less from each customer. It appears Netflix doesn't have the pricing power cable providers have.
The trend in monthly profit per customer doesn't look any better, and could come under siege in coming quarters.
|
Company |
Q1 2010 |
Q2 2010 |
Q3 2010 |
Q4 2010 |
|---|---|---|---|---|
| Netflix (gross profit/customer) | $4.96 | $4.87 | $4.57 | $4.01 |
| Comcast (operating income/customer) | $15.57 | $16.50 | $15.74 | n/a |
Note: Comcast operating income uses margin for all cable products.
The falling gross profit per customer in the fourth quarter only includes a small hit from the Disney (NYSE: DIS) deal the company signed in December. In 2011 Netflix will also have to renew its Starz deal, and if more streaming content is added, margins could be squeezed further. As customers expect more for less I don't see the trend reversing itself any time soon.
When pricing power doesn't hold up
The revenue per customer trend at Netflix is something Sirius XM (Nasdaq: SIRI) may want to consider when it is able to raise prices later this year. Netflix is adding customers at a much faster rate than Sirius with lower cost plans but can't convince people to trade up. Sirius is competing with free or low cost services on mobile phones, so for many of its subscribers a $1-$2 increase could push them away. Subtle rate increases have worked, but if the Netflix model holds true, maybe lower prices are the way to go.
Both Sirius XM and Netflix are really just content delivery companies and as competition heats up for both, the monopoly state they have operated in for the past couple of years will fade away. That is when we will find out how strong their business models really are.
I'm not ready to short a hot stock like Netflix but investors should at least keep an eye on these trends going forward.
More On Multimedia:
