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Wall Street love affair with Netflix suffers first tiff

Once Wall Street has a down on you, it has a down on you

By PETER WHITE

Published: 28 April, 2011

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Once Wall Street has a down on you, it has a down on you. Netflix has just found that out, losing over $1 billion from its stock value, after announcing record breaking results. Within weeks it will be back.

There seem to be issues, say analysts, but underneath that is a failure to classify exactly what Netflix IS. One technology analyst group compared the Netflix ARPU (average revenue per user) to Comcast’s this week, pointing out that with an ARPU of just over $12, US cable companies have little to fear and especially not Comcast with an ARPU of $133.43 last quarter.

This, like many other statements is cockeyed logic. Comcast is asking people to pay ten times the price of a Netflix subscription – how long can customers resist cord cutting to services like Netflix when there is that much disparity, but do we see analysts getting behind a Comcast short? No the price continues to rise – but mostly because now it now owns a content business in NBC.

This is because Comcast is a cable company and analysts have had 20 years to understand what a cable company is, and they do, deep down in their gut. They still have trouble seeing what Netflix is and they worry that it doesn’t own any cables?

Here are the issues as we have picked them up from the coverage. Competitors will emerge to Netflix. TV Everywhere will make Netflix unnecessary. Content pricing will go up. There will be pressure on subscription prices. Studios are experimenting with new release windows. Costs of streaming delivery will go up. Broadband bandwidth caps will come in and strangle the business. The online business has a higher churn rate than DVD rental, so subscriber acquisition costs will go up. Netflix continues to carry postal delivery costs, because lots of people still take 2 or 3 disks a month in the post, as well as online costs, so its costs are duplicated.

One analyst calculated that customer acquisition costs would rise to $500 million and grow faster than savings in reduced DVD shipments and related handling costs.

If you think for say about a minute and a half about all this, you find that most of these ideas a) contradict one another, so can’t all be true and b) are excuses to get out of a stock the analysts don’t understand.

The gains this quarter were just 3.3 million subscribers, at an average of $12 a month, annualized that’s $475 million – so this quarter’s growth takes care of that $500 million rise in customer acquisition costs, on its own.

Just how is a rival meant to stand the same kinds of costs – even one as powerful as Apple or Amazon – if it has to match all of the those customer acquisition costs? Well of course companies like Time Warner Cable and Cablevision don’t have to acquire customers since they would use their attempts at TV Everywhere in order to retain customers. They would GIVE content away to KEEP subscriber revenue? Just one small problem and that’s their content agreements which usually allow an exploitation veto to the content producer – and giving content away free, especially when targeting a tablet, just to kill a customer like Netflix, which is paying the content owners for a service – is not going to enamor cable companies to content producers. Which is why, right now, those same content companies are suing Time Warner Cable and Cablevision, so they can get paid for their TV Everywhere content, especially where a tablet is concerned.

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