Saturday, February 26, 2011

Why Is Netflix's Stock Tanking?

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Why Is Netflix's Stock Tanking?

Popular video streaming service Netflix has celebrated a high stock price for the past year, but the party has finally come to an end. Over the last 12 months, NFLX has more than tripled, earning it the title of best-performing S&P 500 stock. Tuesday, the stock closed at 221.60, but it has fallen more than seven percent as of this writing (205.85), while the entire S&P 500 is down just one percent. Netflix has a big lead: It has twice as many subscribers as Amazon Prime and four times as many items in its library. But it also costs more. Writing on The Street two weeks ago, Jake Lynch called Netflix's stock "indefensibly high." While a smart business idea and model, Netflix has already picked all the low-hanging fruit, Lynch argues. Going forward, things are only going to get more difficult. "Netflix is approching monetary hurdles, ranging from contract renegotiation to a transition to Web-based streaming content," Lunch wrote. "Many media executives are baffled by Netflix's stock performance, including Jeffrey Bewkes, CEO of Time Warner, who quipped to the New York Times, regarding the market's optimism for Netflix: 'It's a little bit like, is the Albanian army going to take over the world? I don't think so.'" For their sake, I hope those media executives were so baffled by its performance that they were shorting NFLX. It's unclear when Tuesday's announcement from Amazon that the online retailer will begin offering its own video streaming service will stop eating into Netflix's performance. Amazon Prime, with an estimated 10 million members, is a program run through the e-retailer that allows customers to pay an annual fee of $79 for unlimited two-day shipping with no minimum purchase requirement. With a press release sent out Tuesday morning, Amazon announced that it would soon begin offering Prime members unlimited access to commercial-free instant streaming of more than 5,000 television shows and movies through a new service called Amazon Instant Video. Customers will be able to stream these offerings on Macs, PCs and other Internet-connected devices. Amazon is an Internet behemoth and one that you don't want moving into your space, but Netflix has a big lead. It has twice as many subscribers -- 20 million -- as Amazon Prime and four times as many items in its digital library. But it also costs more -- and prices recently went up: Netflix subscribers pay nearly $96 each year in monthly installments of $7.99 for the basic streaming service. Do any current Netflix subscribers plan on giving up their service to join Amazon? (Added bonus: Free shipping!) Not too many, I suspect: It's a hassle and people have already grown comfortable with their Netflix subscription, built out a profile that can adequately suggest what titles that might be interested in, etc. But Amazon's competitive service could put a serious dent into the number of new subscribers who can now choose between the two products. How long before Amazon leverages connections to build up a library that competes with -- or even eclipses -- that maintained by Netflix?...

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