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Analyst Says Netflix Should Put Brakes on Foreign Expansion

9 Jul, 2012 By: Erik Gruenwedel

Netflix’s planned foray into another European country in the fourth quarter should be delayed or halted until the streaming pioneer returns to profitability in the United States, an analyst said.

Los Gatos, Calif.-based Netflix has predicated much of its future growth (and profitability) on what it believes to be untapped international subscription video-on-demand markets. That growth is largely underwritten by domestic subscribers — notably hybrid streaming and disc subs — a market segment now seen as dwindling, said Eric Wold, analyst with B. Riley & Co. in Los Angeles.

Wold said Netflix management has admitted that only one-third of lost subscribers have returned following the 2011 pricing/Qwikster debacle, indicating that new subscriber additions since then have been scarce. Wall Street scuttlebutt suggests Netflix will fall short of its guidance of 7 million net new subs in 2012.

Wold believes the competitive environment around Netflix will continue to worsen in coming years — largely from cable-based SVOD offerings, in addition to Amazon Prime and Hulu Plus.

Even with the high level of domestic content commitments during 2012 and beyond, Wold believes Netflix’s streaming-only and DVD-by-mail offerings has the ability to generate substantial pre-tax cash flow from its domestic operations before the cloud of international start-ups and expansions negatively impacted financial results and valuations.

“Our recommendation to Netflix management is to significantly slow or even stop some international expansion plans to improve overall profitability and increase focus on the one region where the company has a commanding lead, a proven access to content and a population base that is accessible by broadband and ready for it,” Wold wrote in July 9 note.

Separately, a federal judge last week approved Netflix’s previously announced $9 million settlement of class-action litigation alleging it violated consumer privacy laws.

The settlement relates to a 2011 class-action lawsuit filed in Northern California on behalf of Jeff Milans and Peter Comstock, both residents of Virginia.

In the suit, the plaintiffs allege Netflix violated provisions of the 1988 Video Privacy Protection Act (VPPA) that disallows video rental services from accessing subscriber information up to two years after cancelation.

Netflix in January lobbied Congress about revising the VPPA to enable software on Facebook that would allow domestic subscribers to share their rental histories with others.

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