Tuesday, October 25, 2011

Netflix Plan to Spend Billions More Than It Has

Just three months ago Netflix was flourishing. Its profits were high, its investors and customers were happy and the only question of its future was how big it might become. However, over the summer the company made the possibly fatal mistake of raising its prices well over an amount its customers were willing to pay. As over 800,000 customers abandoned the company, as did a substantial amount of investors. Now instead of gaining a predicted earnings growth of 38% between 2011 and 2012, the company has in fact lost 37% of its worth in just the last few months. On Monday the company released a statement saying it expects to lose money "for a few quarters" starting next year. But just how much do they plan on loosing?

Netflix has already committed to spending $3.5 billion on marketing and content over the next several years. The goal of this massive investment is to "bring domestic subscriber growth back to life and get it started in new overseas markets". While at face value the plan seems logically sound, many critics have raised the question: Can Netflix really afford to spend $3.5 billion? Since 2007, the company has spent more than $1 billion on share purchases, leaving its cash flow at just $366 million. After factoring in roughly $200 million worth of debt, the amount has reduced down to just $13.8 million. As contracted content payments continue to rise and customer return seems slow at best, it is likely the company's recent announcement will hold true.

If the company continues on its current path, experts say competitors such as Amazon, may soon begin to take interests in takeover. Personally, I couldn't agree more. I have a tremendous doubt that Netflix will be able to regain all that it has lost. I feel that competitors will take advantage if the situation and offer the board of Netflix a chance to save their investments and leave with a sizable profit.

http://online.wsj.com/article/SB10001424052970204777904576653022926782608.html?mod=WSJ_business_whatsNews


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3 comments:

  1. Christina kellyNovember 2, 2011 at 10:17 PM

    I read something around the time Netflix began to have problems that talked about Netflix trying to make their DVD service a separate brand from their instant streaming, which in my opinion was a terrible idea. Completely changing a main aspect of your service or the price dramatically over a short period of time seems to me like a bad move for any company especially one that is affected by illegal downloading.

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  2. Jason LiebermanNovember 3, 2011 at 6:52 AM

    Netflix has recently gone through some terrible management decisions. Decisions to raise prices has led to almost a self-destruct of an extremely strong brand. I believe they must work to regain their clients passion for their services.

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  3. Evan PaineNovember 4, 2011 at 10:00 AM

    I think this rough patch will just reveal how loyal the consumers are to Netflix. Will they be so forgiving for this raised price?

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