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As of November, Netflix’s shares closed at $64.92, a gaping fall from a high of $304.79 in July. The jaw-dropping descent of the popular American DVD-rental and online video streaming service, is attributed to a number of egregious errors committed by the company this year.
With 24.59 million members in the United States and Canada, Netflix is an Internet subscription service for enjoying movies and TV shows online. It also offers a DVD rental service for an additional $2 on top of its basic online streaming plan for $7.99.
According to Tech Crunch, Netflix CEO, Reed Hastings, said in May that, “Streaming is the core of our business and it is growing rapidly. Streaming is much bigger than DVD for us in terms of hours of viewing, growth, and focus. We are seeing massive consumer adoption of streaming.”
To capitalise on its streaming business, Netflix introduced a new pricing system in July which separated the two services, with the streaming plan costing $7.99 and the DVD plan also at $7.99. Selecting both options would cost $16, effectively raising the subscription price by 60% for subscribers.
The announcement, however, was met with an unforeseeable backlash as more than 800, 000 irate subscribers defected in protest of the ludicrous price-hike. In attempt to appease customers, Hastings then announced a scheme to spin-off 2 companies for Netflix’s DVD-by-mail rental and on-line streaming services. However, the announcement was promptly retracted when violent objections arose from all sides.
For a company that began its meteoric rise with effortless access to video entertainment, the move was perceived by many as complicating the rental process.Since then, stock prices have continued to careen.
Last week, the company took steps toward raising $400 million from investors to shore up its balance sheet, selling $200 million of common stock to T. Rowe Price funds, and placing $200 million of convertible debt with the investment fund Technology Crossover Ventures. The purpose of raising capital is to finance Netflix’s expansion plans into the UK and Ireland in the first quarter of 2012.
While financially logical, investors saw the move as underlying the foolishness of the company’s stock repurchases earlier in the year at much higher prices, reports Forbes.
With escalating costs in content investment, Netflix has warned that it expects to lose money in 2012. High-cost ventures into UK and Ireland are also likely to cause the company to incur losses on a global basis in the upcoming year. Barron’s reported on Saturday, November 26th, that it looks as if the company will end up making $4.08 this year and might, at best, make a profit of 75 cents in 2012.
In their letter to shareholders dated October 24, 2011, Hastings and CFO, David Wells, defended their new pricing strategy. “We think that the $7.99 for unlimited streaming and $7.99 for DVD are both very aggressively low prices, relative to competition and to the value of the services, and they are right place for Netflix to be in the long term. What we misjudged was how quickly to move there. We compounded the problem with the lack of explanation about the rising cost of expansion of streaming content, and steady DVD costs, so that absent that explanation, many perceived us as greedy,” Wells said.
In the midst of the immediate bleak outlook, however, there is a silver lining. For one, Hastings is right in that the future of video-watching will be digital.
This has significant financial implications for Netflix. Getting rid of the DVD-by-mail business would allow Netflix to eliminate an array of costs associated with infrastructure and focus instead on investing in content. Moreover, with the amount of money that Netflix has invested in acquiring content, the current valuation makes Netflix an attractive acquisition for competitors such as Amazon and Google.
Netflix remains positive that it will bounce back into a profit-reaping cycle, and is planning to recuperate from domestic losses after launching in the UK and Ireland.