Wednesday, July 21, 2010

Netflix Profits Up, Revenues Down in Q3

Netflix is growing subscribers, Earnings per share is rising, but the rise of internet streaming has caused subs to downgrade their service. As a result, Netflix revenues are down in the third quarter. And here is the rub, because customers are streaming more and taking less DVDs, their plans cost less but the margins go up as mailing costs go down.

"Netflix said 61% of its subscribers are now streaming more than 15 minutes over the Internet, up from 55% in Q1 and 37% in the year-ago quarter. This trend will obviously continue as more Netflix subscribers stream more movies over the Internet. This could potentially force Netflix to raise their fees, or just to deal with lower revenue per subscriber." And with Redbox entering the internet streaming business, it will be hard for Netflix to raise fees to compete. Better margins, higher profits, lower revenue. And competition to boot, which could eat into profits. It is easy to see why the stock market lost favor in Netflix.

Redbox Challenging Netflix AND Cable

As Redbox enters the internet world to compete with Netflix, there is another competitor that they will challenge as well. "The company, the biggest division of Coinstar Inc., may use a Web service to expand its library beyond the 200 or so titles crammed into each of its 24,000 or so DVD dispensers, President Mitch Lowe said in an interview from Redbox’s headquarters in Oakbrook Terrace, Illinois." Certainly they are entering Netflix's space but it is really the space owned by cable's VOD platform. Neither Netflix nor Redbox offer the volume of titles accessible through cable, but they are seen as a cheaper alternative.

In a struggling economy, the consumer is willing to spend more time to find a cheaper alternative. Cable needs to review its pricing policy and offer a range of pricing that demonstrates to the consumer that cheaper choices are available on their TV set and they don't need to look any further.

Of course, Redbox and Netflix aren't the only other players in what is proving to become a very crowded field. "Redbox also faces competition from Apple Inc. and Best Buy Co., which sell movie downloads. Wal-Mart Stores Inc., the world’s largest retailer, bought the Vudu Inc. online entertainment service in February and Sears Holdings Corp., the largest department store owner, said on June 22 it plans to sell and rent movies online through an agreement with Sonic." For the consumer, there is good news. More competition causes price wars and results in lower prices to the consumer. Unless a real quality differentiation strategy is demonstrated, consumers will always look for the lower price choice.

Why Isn't Sirius Stock Price Rising

Despite good news on subscriber data earlier this month, Sirius can't seem to push its stock price over a buck. According to some reports there is bearish pressure pushing the stock price down. Can Sirius survive in the long run? Can it adapt to meet the changing consumer who prefers mobile to auto. Can Sirius find new revenue streams to grow its business or should it dress itself up for a future sale? Is it time for John Malone and Liberty to take it over and invigorate the brand. A great brand languishing deserves some fresh blood.