WSJ warns investors about Netflix

Posted Jan 10th 2009 11:20AM by Zac Bissonnette
Filed under: Products and Services, Competitive Strategy

Netflix (NASDAQ: NFLX) has been a strong performer of late as its affordable home entertainment option proves itself to be recession-resistant.

But I'm still skeptical. As I've written in the past, Netflix's DVDs by mail business will not be viable after technology progresses beyond a certain point. Will they come in three years, five years, or ten years? Who knows, but long term, the company's ability to remain at the forefront of video delivery technology -- and its ability to deliver it at at profit -- is what matters.

The Wall Street Journal's Heard on the Street column (subscription required) raises questions about the viability of Netflix's digital delivery business. Numerous other companies are also racing for market share in the growing category and, according to the Journal, "the sheer cost of acquiring online-viewing content could crush Netflix's profit margins, unless the company sharply raises its subscription price, thereby reducing a key advantage over rivals."

Given that the majority of movie studios make their money on sales of DVDs and television licensing deals, Netflix would likely have to fork over a huge percentage of its revenue if online movies overtake DVD sales.

The stock appears to be pretty expensive for a company with such uncertainty surrounding its future viability.

Tags: digital delivery, DVD sales, inthenews, Netflix, NFLX

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Reader Comments (Page 1 of 1)

1-10-2009 @ 3:59PM

Monte Raitt said...

Netflix has the ability to get movies out and has a customer service second to none. The customers that have been with them for a while will stay and they should not be knocked down till someone has tried there service. I have yet to have had a problem with them and don't think anyone will be able to match there prices.

1-11-2009 @ 12:16PM

gummby said...

I am concerned about Net flix. If you just received 3 or 6 films as part of a promotion with out signing up over the holidays. PLease check your credit card bill. You may have been billed with out ever authorizing or signing up for the service. I am sure this is probably just a misunderstanding....Has this happen to anyone else?

1-11-2009 @ 1:24PM

Sheldon L said...

Think again, Monte -- Zac has Nexflix pegged.

The business is unsustainable in the long run because the Internet by its very nature dilutes everything.

Netflix may always be a player and what you state about the service is true, however, its market share and therefore its market premium will vanish.

1-11-2009 @ 2:08PM

TechInvestor said...

Wow, glad I don't rely on you guys for investment advice. I've been a Netflix share holder for some time and they have done great for me. I think they are very viable for a long term.

Getting license for streams is so crazy right now, we have no idea what the future will bring. To say something like "their market share will vanish" is ridiculous.

1-11-2009 @ 7:19PM

Sheldon L said...

Tech -- Read again,

Market "premium" will vanish, meaning it's just another stock going forward -- not gone. Neither Zac nor I dispute its past performance either.