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Analysts Rain on Netflix, Stock Rises Regardless

By : Erik Gruenwedel | Posted: 09 Apr 2010

Netflix’s newest packaged-media and digital deals with 20th Century Fox Film Corp. and Universal Studios Home Entertainment left some analysts wondering if the online DVD rental pioneer was selling out subscribers for better financial terms and copy depth, among other considerations.

Indeed, with Los Gatos, Calif.-based Netflix’s agreement to delay shipments of new-release movies from Fox and Universal for 28 days — just as it had done in January in a revised agreement with Warner Home Video — the service is essentially betting that its 12 million-plus subscribers won’t mind the inconvenience, analysts said.

“Netflix caves again,” wrote analyst Rick Munarriz with The MotleyFool.com. “I don't like this as a Netflix subscriber, but I appear to be in the minority.”

Ralph Schackart, digital media analyst with William Blair & Co. in Chicago, said Netflix could risk losing subs among the 30% who prefer new releases — “although subscriber additions remain robust,” he wrote in a note.

That subscriber growth could be cooling significantly by 2011, according to analyst Michael Pachter with Wedbush Morgan Securities in Los Angeles.

Pachter said Netflix could expect to generate about 2 million new subscribers this year from recent deals with video game console platforms Xbox, PlayStation 3 and Wii — but down to a minimum of 900,000 net subscribers annually thereafter.

In addition, the analyst expects ancillary sub growth to represent no more than 5% to 10% of U.S. iPad sales.

“Netflix is likely to achieve peak net subscriber growth in 2010, and we think that the company will struggle to gain more [subscriber growth] annually thereafter,” Pachter wrote in a note.

The analyst, who downgraded his Netflix rating to “underperform” from “neutral,” said the focus on subscribers is key to determining the company’s operating margins going forward.

Pachter believes margins will be affected in the near term as more studios begin playing hardball with Netflix regarding the licensing of streaming rights.

The analyst estimates Netflix will spend about $800 million, or 37% of revenue, on content costs in 2010, including about $150 million on streaming content.

“We question whether this percentage is sufficient to satisfy the insatiable appetites of the studios, which typically garner 60% or more of total revenues from theatrical exhibition, video-on-demand and DVD sales,” Pachter wrote. “We think the studios will not be satisfied with anything less than 40% of revenues in 2011, and will insist that the percentage steadily increases each year thereafter.”

Netflix, which does not comment on analyst conjecture or market fluctuations, reports first-quarter financial results April 21.

Netflix stock closed up 59 cents to $82.42 per share.

Related Stories :

Netflix Signs New Deals With Fox and Universal


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