Has Netflix paid too dearly to add movie and TV shows to stream or has it acquired too little content and stalled subscriber growth?
Greg SandovalFormer Staff writer
Greg Sandoval covers media and digital entertainment for CNET News. Based in New York, Sandoval is a former reporter for The Washington Post and the Los Angeles Times. E-mail Greg, or follow him on Twitter at @sandoCNET.
After a couple of months of getting pummeled in the press by doubters at the studios and Time Warner, Netflix will have a chance today to silence its critics.
Netflix is scheduled to report the video service's fourth-quarter earnings after the close of trading. It's a safe bet that many in Hollywood will be watching to see whether Netflix's popularity with consumers has continued to soar.
In October, the company said it expected to add 2.7 million subscribers for the quarter that ended December 31, an unprecedented number for the video-rental service. Netflix predicted it would end the year with about 19.7 million subscribers. If that goal is reached, it would mean a 60 percent increase from the 12.3 million subscribers the company reported a year ago.
Year-over-year growth of 60 percent is white hot, but how long can Netflix keep that up? Skeptics don't believe Netflix can maintain the growth without offering subscribers better quality movies and TV shows for its Internet streaming service. And they argue the cost of doing so is too high for a company that offers an all-you-can-eat streaming plan for only $7.99.
A consensus of financial analysts expects Netflix to report earnings of 71 cents a share on revenue of $598 million, compared with 56 cents a share and $445 million in the year-ago quarter. Look out for plenty of hand wringing if Netflix fails to meet these expectations, or even if it doesn't blow past them.
Investors may get spooked if it appears Netflix can't afford to keep stoking growth by acquiring more content. Already, some analysts have eyed the rapid climb of Netflix's share price with doubt. The stock, which closed trading yesterday at $186.74, has more than tripled over the past 12 months.
If all that isn't enough to undermine confidence, there are the naysayers from some studios and Time Warner who have argued recently that Netflix is driving the value of film and TV content down.
They say a strategy of tossing sought-after movies into a reservoir of streaming video content for $7.99 a month will appeal to consumers but will undercut other distributors, such as Time Warner's HBO. Not everybody at the studios views Netflix this way, but the word from critics in Hollywood is that streaming is the digital equivalent of a schlock outlet store; it should be good enough for the dregs--the straight-to-video fare--but that's it.
Still, what might irritate the anti-Netflix crowd is that the company has managed to acquire a number of hit TV shows and films for streaming. Over the past year, Netflix signed licensing deals that enables it to stream material from the likes of Paramount, ABC, Disney, Lionsgate, NBC Universal and MGM.
In one agreement reached last summer, Netflix managers acquired the rights to stream "The Fighter" sometime this year. The company will get the Academy Award-nominated film for streaming a few months after it debuts on DVD.
The movie is a nice fit for Netflix. "The Fighter" is about "Irish" Mickey Ward, a boxer who overcame a mediocre early career and a complicated relationship with his family to become champion. Not only is the film proof that Netflix can acquire hit films for streaming but that Netflix has its own long-odds success story and it's something investors should consider regardless of how Netflix fares this quarter.
In 1999 when Netflix was getting started, few gave an Internet company much of a chance at competing against large, established rental chains. But Netflix toiled for years to perfect a devastating combination: DVD rentals via mail, subscriptions and a promise not to charge late fees.
In 2009, down went Movie Gallery/Hollywood Video, the country's former No. 2 challenger in film rentals. Then, a badly staggered Blockbuster chain finally filed for bankruptcy protection in September. The once dominate brick-and-mortar rental business is now in the process of closing hundreds of stores.
After a decade of struggle, Netflix is the undisputed power in movie rentals.
The lesson for investors is that Netflix didn't send Blockbuster to the canvas in a single fiscal quarter and that on-demand video won't be won that quickly either. Whatever Netflix reports for the fourth quarter, the company's record shows that it can absorb criticism and setbacks while patiently waiting for opportunities to strike.
Note: If you want to see the real Micky Ward in action and one of the reasons why actor Mark Wahlberg was so persistent in getting Ward's story told, watch this clip of Ward and the late Arturo Gatti from their first fight. Be warned, it's not for the squeamish.