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2good2betrue (< 20)

Future prospects look cloudy

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February 03, 2011 – Comments (0) | RELATED TICKERS: NFLX

First off, I'm a NFLX subscriber since 2001, have written several reports on them while their stock was still languishing in the 20s. Clearly this company has carved out a nice niche for itself for at least the near term. I've also read the somewhat recent note that its CEO wrote who tried to defend NFLX's current price and future prospects.

 When this company was battling Wal-Mart and blockbuster, I puzzled my friends when I told them NFLX will have more subscribers than Comcast in the not to distant future. They all laughed about me making such a bold statement - I just said, think of them as a Tier 1 MSO and see if you would like them then. So, if you think they are successful with 5 mm subs, what do you think they will be like with 25 mm subs? Sounds great, huh?

I still like them, only not as much – in fact I'd even go so far as to say "increasingly less". Their price keeps going up, and while their service remains fairly consistent (good thing), the price increases are not followed up by significant and meaningful improvements to their core services. The competition, (e.g. Cable) does a sneaky thing - it continually adds more worthless channels to its service and then at the end of the year, increases their prices - the newly added channels cost them very little, but the gains in raising prices are significant and as for their subscribers, well, they keep drinking cable's water. I guess the TV addition is alive and well.

NFLX raised their prices, but what did they give its subs? We'll I can tell you - nada! Never mind the fact that its oldest subs were key to it staying in business not so long ago - we all remember. Back then, NFLX was so bold as to even lower its prices to keep customers.

Now NFLX is going global! Doesn't that sound great...? We'll what I read from that is the company is going to place more time and resources on building foreign markets. However, I can tell you it has plenty to fix here at home. Here is just a "short list of things" - many there isn't an easy solution:

Blu-ray service needs a lot of attention - NFLX charges more for it now, but the discs still come with scratches on them and since the players haven't yet mastered how to handle surface scratches (even 3rd and 4th generation players), they either freeze, reboot, or something else (which ultimately isn't pleasurable to watch). This really needs to get fixed QUICK, as blu-ray is not proving to be packaged media that is kind to the rental market. If it remains unchecked, HD VoD is going to obliterate blu-ray. Also, these blu-ray players are so dumb, if someone shuts off the player and goes to bed, blu-ray players aren't smart enough to recall where the movie left off (better yet rewind it a tiny bit), to allow its user to continue where they left off. Bose has had this feature for years on its DVD player. Stop/resume play is yet another tricky feature of blu-ray for no good reason – many times stop will reset play to the beginning.

The streaming service is running out of steam - When you start using the streaming service you say, wow! But after a year or so, you really have to struggle to answer the question - "What has this offering done for me lately?" Answer, we'll you need to go back to watching old movies as that is all that is left - however I can't even watch Star Trek or Gilligan's Island (These are old, but the service only offered Star Trek [the original series] for a short time, not any longer). Does anyone see a problem with this other than me? There is also the matter of searching for films which is currently one dimensional - you can only search by title. This is WAY behind the times. I also believe this streaming business isn't as beatable - There are a lot of dynamic players, some large some small and many that offer niche content and highly attractive pricing models, there is also a lot of locked up content – no one will ever own it all or get any exclusives – I call this a moving target. NFLX seems to be trying to be more like cable, where as in their packaged media rental business they were like no one else - which is likely why there were so successful. Streaming isn’t something NFLX will dominate, as will no one else – just ask Hulu, Amazon, Microsoft, Comcast, etc.

NFLX website is getting old and tired - By in large, the whole site is due for a major upgrade - most of it still looks the same as it did in 2001. Sure the movie picking has improved, perhaps even the search engine, but the rest of the site is quickly becoming a dinosaur. Also, the concept of a queue - which was novel at first has begun to loose its usefulness. Particularly in the case of instant movies. All that needs revamping.

Going global to me is NFLX talk for we are doing great so lets expand. Blockbuster and Amazon once thought that way and while Amazon was somewhat successful (particularly in France and UK), I don’t believe Blockbuster ever was – and are slowly but surely doomed to the same fate of Digital Dogpound  with a corporate office in Waverly, IA.

Problem is, that should be the last thing NFLX should be thinking about - NFLX best start focusing on its core or it will begin to loose its edge and its flock will find some other service to drink. The current value of NFLX stock assumes it will make hay with its instant moving watching service – only I’m convinced that business is unbeatable particularly by a packaged media focused business. To win in online streaming, NFLX is going to have to do what it originally did to the packaged media business - reinvent, not go global.

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