Netflix (Nasdaq:NFLX)was born as a response to customer dissatisfaction. A late fee on his "Apollo 13" DVD prompted Chief Executive Officer Reed Hastings to start the Netflix DVD rental business with no late fee, shipping charges or handling charges all for a one time flat fee. It went a step further and mailed indie films, hitherto not easily available. It also provided a net streaming service at no extra cost. For all this customer delight, Netflix was quickly crowned the darling of the DVD rental and movie net streaming market.

TUTORIAL: Business Planning

Mass Exit
Then Netflix did something that saw it losing about 800,000 customers. In 2011 Netflix announced that it would be ending its offer of unlimited DVDs and video streaming for the single monthly price of $10. The new offer stated that customers could avail either unlimited DVDs or unlimited video streaming, by paying $8 a month. For customers who sought both services, it would now cost $16 a month. Netflix expected some subscriptions to be withdrawn, just not 800,000.
It shelved its plan of rebranding its DVD mail rental service under a new entity called Qwikster and the new pricing stayed.

Many customers saw the new pricing as a sign of Netflix being too comfortable, arrogant and presumptuous. Since Netflix entered the market, newer kids had arrived on the block, the neighborhood DVD kiosk, Redbox, for example. Google (Nasdaq:GOOG), Amazon (Nasdaq:AMZN) and Youtube, with their deep pockets, had started taking their tentative first steps in the net streaming business. Blog apologies were submitted by the CEO and Netflix closed with an earnings jump of 63% in the third quarter of 2011, but lost 800,000 subscribers. Many industry watchers felt this could be the end of Netflix's pole position.

The company had its own perspective on why it did what it did and where it was headed; Netflix believes net streaming is the future. In countries where it now plans to expand into (U.K., Ireland, Korea and possibly India), it offers only its net streaming service. However, high quality content with diversity, available with DVDs, is not yet fully available. Netflix is therefore looking at developing independent content for its net streaming business. It has picked up the rights to Kevin Spacey's new show "House of Cards" and an ex-Fox show "Arrested Development."

Netflix, is also staring at a steep rise of its licensing fees. Netflix's streaming content licensing costs are expected to rise from $180 million in 2010 to $1.98 billion in 2012 (CNN money). Studios are opening their eyes to this new opportunity as net streaming technology makes it more seamless and widely available. Cash rich players like Google and Amazon, for whom it is not the core business, are willing to pay to increase their portfolio. Net streaming, unlike the DVD business, works on fee-per-use model. Unlike DVD content, Netflix has to negotiate for content rights in net streaming. Many content owners are not studios and some content right holders are hard to find. This makes net streaming content costs far more variable. This has also made the net streaming catalog seem limited.

The Netflix foray into newer markets around the globe is part of its strategy to stay on top of its game. It has forged partnerships with Lionsgate, Miramax and MGM in U.K. and Ireland. It is also in talks with regional players in India, Korea and South East Asia to make inroads in the net streaming markets there. It has also entered Latin America (Mexico, Central America, South America and the Caribbean), which gets content in Spanish and Portuguese, in addition to English. Netflix is also paying up-front licensing fees in these countries for its net streaming services. Other issues include piracy and low broadband speeds. The large markets and the love of things Hollywood make foreign markets the obvious way to grow for Netflix. (For more, read Analyzing Show Biz Stocks)

Branching Out
Netflix is also looking at partnership with the social media network giant Facebook. At the time of writing this article Netflix announced the launch of "Ice Cream Sandwich," the support for Android 4.0 mobiles tablets and other Android devices. With newer TVs, where net streaming is possible, Netflix considers it a key part of its strategy to make its content available in as many devices as possible. (For more, read What Makes An M&A Deal Work?)

Netflix plans to turn its $200 million debt into being in as many places and platforms as possible to grow. Unlike many other players in the digital space, net streaming of film-based content is its bread and butter. It will fight aggressively to stay the leader and sustain long-term growth despite high costs.

The Bottom Line
Product categories, including DVD rentals are increasingly becoming commoditized. Net streaming is the new, unmarked territory where rules still have to be made. Netflix recognizes this and is moving forward, but it needs to do so with their domestic subscribers, who seek more bang to their buck, in place.

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