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Netflix naysayers are many but subscription model looks sturdy

Analysts will be closely watching to see how Netflix is managing higher costs when the company reports earnings today. However it fared in the fourth quarter, the video-rental company seems to have been threatened very little by rivals.

The Netflix bears are salivating.

Last year's flirtation with Qwikster was one of Netflix's missteps that rivals weren't able to cash in on. Netflix

When the video-rental company reports earnings later today, Netflix's financial performance is expected to show sluggishness due to higher costs of streaming content and an international expansion. The company's increased dependency on streaming movies over the Internet is supposed to mean slimmer margins than when the business was focused on renting DVDs.

In the immediate future, movies from Disney and Sony Pictures are supposed to disappear next month. Netflix obtained those films via a deal with Starz, the premium cable-TV service, but the contract was not renewed. This will diminish an already slim selection of movies in Netflix's streaming library. To judge the impacts of that, we'll have to wait until the company's second-quarter report.

Analysts expect Netflix to post a fourth-quarter profit of about 54 cents a share, down from the 87 cents the company reported in the same period a year earlier, according to Bloomberg. Sales are predicted to come in around $857 million or a 44 percent increase from the year-ago period.

Even if Netflix stumbles this quarter, there's plenty for Netflix fans to be excited about.

If Netflix shows that it continues to add subscribers at a comparable rate to what it did prior to announcing a much-maligned price increase last summer, I would say the company has plenty to celebrate. Netflix alienated millions by raising prices on a popular hybrid subscription plan. Managers followed that with a series of public relations blunders that threw subscriber growth into reverse. Since the summer, Netflix has been criticized and ridiculed by customers and the media and the company has never seemed as vulnerable.

Competitors took advantage of that to knock the company off as the Web's leading outlet of premium movies and TV shows, right?


Netflix is still top dog--it still possess more than 20 million customers and no other Web-only rival comes close. Netflix's business is in no doubt challenged by higher content-acquisition costs and the overseas expansion. Hollywood is still not enamored with the company. Yet, one of the most significant revelations to come out of the Netflix meltdown last year was the inability of competitors to make up ground.

The revamped Blockbuster is having to close more DVD stores than anticipated. Hulu Plus, backed by three media heavyweights (Fox, NBC, Disney), added 1 million new subscribers last year. Compare that to Netflix which for nearly two straight years added 1 million subscribers each quarter.

Over in Hollywood, the studios have created UltraViolet, a platform they hope will foster competition among cloud movie services. Thus far, retailers appear reluctant to sign on.

Netflix's success has less to do with customer loyalty than it does with the business model. Charging people a low monthly fee for all-you-can-eat movies is a good deal and there just isn't another one available that offers as many movies for as low a price. Amazon may have become an even bigger believer in subscription movies recently. Claire Atkinson of the New York Post, reported this morning that Amazon is considering whether to turn its movie service into a standalone subscription offer.

The power of the subscription model in distributing movies can't be overlooked. Barry McCarthy Netflix's former CFO, said during a 2008 interview with the Unofficial Stanford Blog, that in the early days Netflix made little progress renting movies on a per-title basis.

"It was Reed [Hasting's] insight that the subscription model would resonate with consumers in a compelling way," McCarthy said. "He re-engineered the Web site and software to support a subscription model...we began to grow exponentially overnight...We were I think five years to $500 million (in sales) and another three years to a $1 billion, all because of the subscription model."