etflix had a rough 2011. First, the business that killed your local video store upped its subscription fees for DVDs in the mail, infuriating customers. Netflix then tried to spin its DVD-by-mail business into another company, the oddly-named Qwikster, which hardly went down any better. The stumbles were part of Netflix's attempt to pivot to internet streaming, which it predicts is how most people will watch television shows and movies in the future. But investors aren't cottoning to its new business model, and Netflix's share price fell by nearly 15 percent after its latest financial report. To put Netflix's woes another way, in August 2011 "a share of Netflix costs $60 less than a share of Apple," says Nicholas Thompson at The New Yorker. "Now it costs $460 less." Can Netflix recover from its missteps?
Yes. Its internet streaming business is growing: Don't buy the market's supposed negativity, says Andres Cardenal at The Motley Fool. "Netflix seems to be making progress on the dramatically important subject of customer growth," adding three million new streaming customers in the past quarter alone. And the company is undoubtedly right that "the future of the business is going to depend on streaming," and it is doing precisely what it needs to do to move beyond its price-hike debacle: "Regaining customers and growing again."
"Big risks and opportunities in Netflix"
But any company can stream movies over the internet: The streaming business isn't hard for competitors to break into, says Thompson at The New Yorker. Just look at Amazon, which is rapidly expanding its own streaming service. Netflix's great advantage was customer loyalty and the "high barriers to entry" that its DVD-by-mail model posed. "It's not easy for a start-up to build massive warehouses and systems for mailing discs." Netflix once offered a $1 million prize to anyone who could improve its algorithm for movie recommendations — perhaps it should offer a similar prize "to someone who can figure out a new business model."
"Is Netflix doomed?"
And streaming will only get more expensive for Netflix: Movie and television studios have learned that Netflix, eager to outdo its competitors, "will pay astonishing sums for streaming rights," says Felix Salmon at Reuters. "This is why I'm fundamentally pessimistic when it comes to Netflix's prospects: Any time that Netflix builds up a profit margin, the studios will simply raise their prices until that margin disappears." Netflix's model is unsustainable. Its customers are "paying for the content, not for the pipe," and they will eventually begin just directly paying the studios and others who actually produce the content.
"The problem with Netflix"
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