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Why Netflix Could Keep Plunging
By: StreetAuthority   Wednesday, April 25, 2012 12:00 PM
This kind of back-end loaded guidance should always give you pause.

Meanwhile, I can tell you from first-hand experience that the DVD-by-mail business is slowly being starved. Almost all of the 20 titles sitting in my queue of DVDs that have been recently released are flagged with a "Very Long Wait" distinction. This tells me the company is ordering far fewer discs and is tacitly trying to nudge customers like me over to the streaming service. But here's the rub: I tried the streaming service last fall and found the selection of available titles severely lacking, effectively forcing me to tack back to the DVD-by-mail offering.

(block:block=16)Hastings has made no secret of the fact that in an increasingly costly environment for content rights, Netflix will need to start offering more proprietary content and less licensed content. To be sure, it's not clear the company really has a choice, as movie studios and others are gearing up for their own Netflix-like services  and have little interest in aiding a key rival. (Please take a fresh look at my previous article for a fuller discussion of rising competition.)

Another key point that I've seen raised: The DVD-by-mail business has huge barriers to entry. The streaming business does not. Taken to a further level, Netflix may actually be at a disadvantage. For example, DirecTV (NYSE: DTV) is aiming for a major software upgrade this summer that will facilitate simple streaming on a wide range of devices. And the firm has the industry relationships to either hammer Netflix on cost or beat the company on timely content rights.

Slowing growth
Taken together, the streaming and DVD-by-mail business appear poised to modestly grow in the next few years as the market gets closer to saturation and rising competition erodes market share. That's why Netflix is vigorously pursuing an international expansion. The company is off to an impressive start, with 3.1 million subscribers, but it appears as if the company's marketing expenses are coming in much higher than forecast (leading to a $100 million quarterly loss in international operations). This helps explain why Netflix is expected to lose around $0.25 a share this year. Net/net, the company is emphasizing a pair of low-profit segments (streaming and international) and de-emphasizing the most profitable (DVD-by-mail), which just seems unwise.

No doubt, the international expansion -- if it pays off -- is to be applauded.

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