by Anthony John Agnello | January 27, 2012 8:00 am
You almost expect Netflix CEO Reed Hastings to walk out on stage holding a boombox on his shoulder blasting LL Cool J’s “Mama Said Knock You Out.”
Netflix (NASDAQ:NFLX) had a solid fourth quarter, bringing in $876 million in revenue and EPS of 73 cents, handily beating Wall Street expectations of $857 million. What’s more, Netflix has cauterized its wounded reputation and stopped bleeding subscribers.
While the streaming-video company’s subscriber rolls had dropped to 23.79 million in the third quarter, growth resumed over the holidays to close 2011 with 24.4 million subscribers. There was even some vindication for Netflix’s botched plans to spin off its DVD rental business. DVD memberships account for just 11 million of the company’s paying members, while 22 million subscribe to the streaming service.
Netflix is swinging back, and though the company is warning that losses are guaranteed as it expands into international markets, it appears that going out of business is no longer a worry. Yet even as Netflix recovers, it has to be concerned about future competition from Amazon (NASDAQ:AMZN).
Amazon, which launched a streaming video service as part of its Amazon Prime premium membership last year, is going to challenge Netflix with more than just content. The online retailer is about to launch streaming-video price war.
According to a Tuesday report in The New York Post, several executives in the TV and film industry have said Amazon plans to spin off its streaming-video service from the $79-per-year Amazon Prime. Netflix, lending credence to the rumor, said in its quarterly earnings preview that not only does it expect Amazon to offer its streaming service as a stand-alone product, it expects Amazon’s  streaming subscriptions to be cheaper than Netflix’s.
Consumers would undoubtedly be thrilled if Netflix dropped the price of its streaming subscriptions to keep pace with Amazon. It would be received as a full-on apology for the subscription-pricing fiasco that nearly destroyed the company last summer (and certainly hurt investors, who watched the shares shed nearly 80% of their value in just one quarter). No matter how lovely the PR boost might be, however, Netflix can’t afford to drop its streaming subscription prices right now.
The company is spending massive sums of money as it works to secure a viable future. Hastings said at the UBS Media & Communications conference in December that Netflix will spend as much as $300 million developing new content, including new episodes of Arrested Development; David Fincher’s series, House of Cards; and the Lionsgate (NYSE:LGF) original, Orange is the New Black. That’s part of the $1 billion to $2 billion it plans to spend on content licensing this year.
Of course, as Netflix’s spat with Liberty Media‘s (NASDAQ:LSTZA) Starz network proved last fall, the cost of streaming-content licenses is only going to rise over the next year as audiences increasingly turn away from cable. Even if Netflix spends $2 billion on content, it will get less for its money — and a perceived lack of new content options could turn off fickle consumers.
Those costs will be added to the spending Netflix is doing to expand into markets outside the U.S. (which will naturally necessitate even more spending on new licenses). Netflix will save some money as its snail-mail DVD-rental business slows, but those gains will be offset by revenue losses since DVD subscriptions are more lucrative than streaming.
The best-case scenario for Netflix is that it maintains its streaming pricing and keeps growing its membership. Amazon’s remodeled business could throw off that fragile balance.
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.
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