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Netflix Admits Error in Foreign Content Cost Disclosure

31 Oct, 2012 By: Erik Gruenwedel

International content expenses increased 348% instead of 14% cited in third quarter fiscal reports

Netflix Oct. 31 said that international content costs for its subscription video-on-demand streaming service increased 348% in the third quarter (ended Sept. 30) rather than the 14% increase erroneously cited in regulatory filings.

Los Gatos, Calif.-based Netflix attributed the error to a typo – which appeared twice – in the “management's discussion and analysis of financial condition and results of operations” section on page 24 of the filing.

Specifically, Netflix attributed the year-over-year corrected content costs to streaming service launches in Latin America last year and in the United Kingdom and Ireland beginning in February. The costs did not include recent Netflix service launches in Scandinavia.

The correction comes following Netflix’s downward revision of year-end net domestic subscriber growth projection of 7 million to around 5 million.

Michael Pachter, analyst with Wedbush Securities in Los Angeles, last week in a note said he believed that not only had Netflix understated foreign streaming costs, but that it also hadn’t properly associated technology and development costs with its domestic streaming segment. Pachter believes Netflix’s domestic streaming profit is off by as much as 90%.

“We think that this is a gross [understatement], and one that has led many investors to conclude that the domestic streaming business is highly profitable,” Pachter wrote in the Oct. 24 note.

Meanwhile, Netflix reportedly saw a 20% in streaming activity nationwide Oct. 29 as Hurricane Sandy bore down on the East Coast.

With a higher than usual captive audience in a densely populated region, Peter Kafka with AllThingsDigital.com in New York opined that Netflix should offer transactional video-on-demand and electronic sellthrough options, in addition to SVOD.

“We dropped $25 on iTunes yesterday (Happy Feet and The Lion King), and I have a hunch we’re going to spend more before the city dries out. Some of that money could be yours, Reed Hastings,” Kafka wrote in a post.

Finally, Microsoft has no intention of buying Netflix, according to dealReporter.com, which cited sources familiar with the software giant. Speculation about a possible deal sent Netflix shares up significantly Oct. 26. 

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