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Slow Wii, PlayStation 3 Sales May Mean Trouble for Netflix

Video game consoles vital to NFLX's growth


Netflix (NASDAQ:NFLX) Logo

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Seemingly impervious Netflix (NASDAQ:NFLX) has taken a few body blows this summer. Shares in the streaming video and by-mail DVD rental company hit an all-time high over $300 per share July 13, just one day after it announced a drastic change in its subscription pricing. But after separating its DVD rental and streaming subscriptions into separate $8-per-month services, consumers turned on the company, crying foul over what could be interpreted as a 60% fee hike. Shares have since declined to around $265.

Reed Hastings, Netflix’s outspoken CEO, said his company expected an even greater backlash following the price jump, and his expectations for the company’s third and fourth quarters, while modest, still are promising growth. But regardless of its stability after the price increase, Netflix might very well be in for a growth crisis it can’t directly control.

Netflix’s problem isn’t the quality or cost of its services. The problem is video game consoles. A July 27 report from Nielsen said that 50% of Netflix users — around 13 million consumers total — watch Netflix exclusively through game machines. About 13% watch via Sony‘s (NYSE:SNE) PlayStation 3, 12% through Microsoft‘s (NASDAQ:MSFT) Xbox 360, and a whopping 25% of Netflix’s streaming audience watch through Nintendo‘s (PINK:NTDOY) Wii console.

The problem for Netflix is that game console sales have slowed significantly in 2011. According to Sony’s second-quarter earnings report, the company sold nearly 1.5 million PlayStation 3s, down significantly from close to 2.5 million machines during the same period in 2010. The once dominant Nintendo Wii did similar business over the second quarter, with just more than 1.5 million consoles sold — but that figure represents the second consecutive year of declines for the machine.

Microsoft’s Xbox 360, on the other hand, had a stellar second quarter, with around 14 million devices shipped worldwide, but that device is something of a sticky wicket for Netflix.  Xbox users have to pay for Xbox Live, Microsoft’s subscription-based online network service, in order to use Netflix on the system at all, meaning there’s an extra level of cost between the streaming video service and its potential new customers.

Just because console sales have slowed doesn’t mean that there isn’t new opportunity for Netflix to grow amongst that audience. There are close to 40 million Wii devices in homes around the world, meaning Netflix still can capture many millions of new viewers. The same can be said of the Wii’s competitors.

That said, the decline in console sales betrays a level of consumer disinterest in current gaming machines that could equate to stagnation for Netflix on a long enough timeline. With no new home console or marquee device like the Xbox 360’s breakout Kinect controller due out this holiday, Netflix will rely on other popular technology to evangelize its business.

Apple (NASDAQ:AAPL) is sure to do gangbusters this holiday. Considering that just 3% of Netflix users stream video via the iPad, though, that’s likely cold comfort for a company that needs to keep growth strong.

As of this writing, Anthony John Agnello did not own a position in any of the stocks named here. Follow him on Twitter at @ajohnagnello and become a fan of InvestorPlace on Facebook.

Article printed from InvestorPlace Media,

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