Netflix Q1 Results - Loss of another 1 million Disc Subs

Lee Stewart · 04-24-2012, 01:12 PM

Quote:

Originally Posted by PSound

I am going to provide an example of fixed cost vs variable cost for illustrative purposes using an example of a movie theater. These are fictitious businesses, but should explain the difference between models.

Movie theater with variable cost:

Movie theater has an agreement with the studios to give them $5 for every ticket sold. The theater sells tickets to see the movie for $7. No matter how many tickets they sell, they make $2 per ticket sold (minus overhead, etc).

If they sell 5 tickets, they bring in $35 in revenue. give $25 to the studios and net $10.

If they sell 20 tickets, they bring in $140 in revenue, give $100 to the studio and net $40 - $2 ticket as the variable cost means they ALWAYS make $2 a ticket. It is simply not possible to sell that $7 ticket without generating $5 in costs.

Movie Theater with fixed cost:

Theater buys right to display movie for $50.

They sell tickets to the movie for $5 each.

If they sell 5 tickets, then bring in $25 in revenue, give $50 to the studio and incur a net loss of $25.

If they sell 12 tickets, they bring in $60 in revenue, give $50 to the studio and net $10.

If they sell 20 tickets, they bring in $100 in revenue, give $50 to the studio and net $50.

The fixed cost means that the amount made per ticket changes dramatically with scale of revenue. With 12 tickets sold, the income per ticket averages out to $.83 a ticket. With 20 tickets sold, the income per ticket averages out to $2.50 per ticket. With the fixed cost model, tickets sold do not directly trigger the direct rise in costs (as above where a $7 ticket cannot be sold without triggering a direct $5 cost).

Now, the fixed cost model does not exclude changes in costs at different times. During another period/showing it might be $60 for the theater to gain rights to display the movie.

And of course the illustration above does not take into account overhead, marketing, etc for either model. But it does clearly show the basic difference between fixed cost and variable cost.

In variable cost, costs rise linearly with revenue within a reporting period (something cannot be sold without generating direct costs).

In fixed cost, costs do not rise directly with generated revenue within a reporting period. Revenue generated does not trigger an immediate direct rise in costs.

You first example is a Fixed cost not a Variable cost. Their fixed cost is $5 per ticket. If they sell 1 ticket or 1000 tickets, their cost never changes. That is the definition of FIXED COST. Not the outcome of how many tickets are sold.

To make it a Variable cost it would be like this:

1 to 100 tickets sold, cost = $5
101 to 500 tickets sold, cost = $4
501 to 1000 tickets sold, cost = $3

cost

Quote:

the price paid to acquire, produce, accomplish, or maintain anything

http://dictionary.reference.com/browse/cost?s=t

Dave J · 04-24-2012, 02:18 PM

Reviewing the quarterly results just makes you shake your head over the eagerness of Netflix to kill off their disc business. Why the heck they don't nurture that incredibly profitable side until the conclusion of its natural lifespan is beyond me.

HD Goofnut · 04-24-2012, 02:41 PM

Quote:

Originally Posted by Dave J

Reviewing the quarterly results just makes you shake your head over the eagerness of Netflix to kill off their disc business. Why the heck they don't nurture that incredibly profitable side until the conclusion of its natural lifespan is beyond me.

Because they want to continue to tap into that immediate gratification/portable market even more. I don't agree with it either, but there it is.

Lee Stewart · 04-24-2012, 03:10 PM

Quote:

Originally Posted by Dave J

Reviewing the quarterly results just makes you shake your head over the eagerness of Netflix to kill off their disc business. Why the heck they don't nurture that incredibly profitable side until the conclusion of its natural lifespan is beyond me.

Look at it from a cost/expense issue. What infrastructure is required to do a disc-by-mail program versus a streaming program?

h0mi · 04-24-2012, 04:09 PM

They must be worried about the impacts to the mail order business once those postal service cuts/postage increases takes place (which reminds me, wasn't it supposed to be in April that saturday delivery went poof? )

They have a huge leg up in terms of digital distro- apps on pretty much every device out there.

**bruceames** · 04-24-2012, 04:40 PM

Quote:

Originally Posted by Dave J

Reviewing the quarterly results just makes you shake your head over the eagerness of Netflix to kill off their disc business. Why the heck they don't nurture that incredibly profitable side until the conclusion of its natural lifespan is beyond me.

Beyond me as well. Sure, streaming is the future but they should be milking and nurturing the DVD side because that's where most of their profit is coming from. Why or how much longer is not nearly as important as the fact that it is much more profitable RIGHT NOW.

Money should be doing the talking here but instead it's the BS.

Kosty · 04-24-2012, 05:19 PM

Quote:

Originally Posted by Lee Stewart

Look at it from a cost/expense issue. What infrastructure is required to do a disc-by-mail program versus a streaming program?

Their disc by mail infrastructure is already built and bought and paid for.

Its obviously still operating at a profit.

No reason to kill it off why its still making money.

Kosty · 04-24-2012, 05:24 PM

Quote:

Originally Posted by h0mi

They must be worried about the impacts to the mail order business once those postal service cuts/postage increases takes place (which reminds me, wasn't it supposed to be in April that saturday delivery went poof? )

They have a huge leg up in terms of digital distro- apps on pretty much every device out there.

That has to be a concern, but they already have done that switch by separating out the digital streaming part and getting the disc by mail people to pay more. Their streaming business will naturally gain from consumers that will not like the loss of Saturday service. But that would not be seen as Netflix's fault.

Kosty · 04-24-2012, 05:27 PM

Quote:

Originally Posted by Dave J

Reviewing the quarterly results just makes you shake your head over the eagerness of Netflix to kill off their disc business. Why the heck they don't nurture that incredibly profitable side until the conclusion of its natural lifespan is beyond me.

Quote:

Originally Posted by bruceames

Beyond me as well. Sure, streaming is the future but they should be milking and nurturing the DVD side because that's where most of their profit is coming from. Why or how much longer is not nearly as important as the fact that it is much more profitable RIGHT NOW.

Money should be doing the talking here but instead it's the BS.

No reason to irritate the disc only customers and push them away when they are still profitable before they attrit naturally on their own.

Especially with the PR speak of last summer.

I agree with you guys totally.

I like the fact that Netflix streaming is getting better over time. But I do not understand why they just don't give a little bit more love to their disc by mail customers and harvest that revenue stream for as long as they can.

Lee Stewart · 04-24-2012, 05:31 PM

Quote:

Originally Posted by Kosty

Their disc by mail infrastructure is already built and bought and paid for.

Its obviously still operating at a profit.

No reason to kill it off why its still making money.

What gave you the impression they were "killing it off?"

What does it take to maintain that D-b-M infrastructure . . . vs a streaming infrastructure?

PSound · 04-24-2012, 06:14 PM

Quote:

Originally Posted by Lee Stewart

You first example is a Fixed cost not a Variable cost. Their fixed cost is $5 per ticket. If they sell 1 ticket or 1000 tickets, their cost never changes. That is the definition of FIXED COST. Not the outcome of how many tickets are sold.

To make it a Variable cost it would be like this:

1 to 100 tickets sold, cost = $5
101 to 500 tickets sold, cost = $4
501 to 1000 tickets sold, cost = $3

cost

http://dictionary.reference.com/browse/cost?s=t

Once again, you are demonstrating that you simply do not understand the concepts being discussed.

Unit cost (where production or acquisition of one unit) is always going to be a variable cost model. New items must be acquired or manufactured to generate revenue (that is the definition of variable cost).

The concepts being discussed are a matter of revenue vs cost.

The reason your examples continually fail is that you cannot comprehend the need to include both revenue and cost in order to even begin the discussion.

You simply do not comprehend even the most basic premise of fixed cost vs variable cost, and how the core difference is whether costs rise with revenue within the reporting period. Variable cost is called "variable" because the costs of revenues rise (usually linearly) within the reporting period. For example, Apple cannot recognize revenue from selling an iPad without also incurring a cost FOR EACH AND EVERY ONE SOLD. Their costs are VARIABLE based directly on the number/volume of iPads sold.

Netflix streaming can sign as many subs as it can in a reporting period, and the content costs do not directly shift in the quarter based on those costs. Costs may increase in the future due to providers wanting more money for a different baseline of subs, but that occurs outside of the revenue generated within a particular reporting period.

And (again), it is well understood by people who get this topic that fixed cost does not mean permanent. It simply means that revenue generated within a particular reporting period does not require a direct increase of costs within that period (as selling an iPad would require recognition of COGS within that reporting period).

PSound · 04-24-2012, 06:17 PM

Quote:

Originally Posted by bruceames

Beyond me as well. Sure, streaming is the future but they should be milking and nurturing the DVD side because that's where most of their profit is coming from. Why or how much longer is not nearly as important as the fact that it is much more profitable RIGHT NOW.

Money should be doing the talking here but instead it's the BS.

I think you have it dead wrong.

Netflix is milking and nurturing the DVD side. Just take a look at the drop in DVD margin in Q1. They are obviously investing in that business.

The problem is not Netflix wanting to make money from the business. The issue is that consumers are moving on from OD. You can see it in absolutely every metric. Both consumer sell through and rental revenue are declining. Netflix is wisely using this time of decline to build other growing markets. It is called good business.

Kosty · 04-24-2012, 06:40 PM

Quote:

April 24, 2012
The New Yorker

IS NETFLIX DOOMED?

Posted by Nicholas Thompson

For a while, Netflix seemed like the smartest tech company around. Searching for movies online was easy; mailing them back off-line was cathartic. The company constantly tweaked its red envelopes, trying to create one that you could open while tipsy and seal one-handed while late for work. Customers were treated with respect. If you sent two discs back in the same envelope, Netflix didn’t care. Employees were treated like adults. Anyone could take vacation whenever he or she wanted. The company’s attention to detail was brilliant: the company charged everyone the same monthly fee, but subscribers who watched movies obsessively had new films sent a little more slowly.

Netflix also created a pretty darn good algorithm for figuring out what movies we’d like: what titles would make us happier and less likely to switch to a competitor. When innovation on the algorithm stalled, the company created the Netflix Prize and offered a million dollars to the first team of mathematicians who could improve the recommendation engine by ten per cent. Three years later, they had a winner. Netflix was the master of all the buzzwords of the old world (customer service; supply-chain management) and all the buzzwords of the new world (crowdsourcing, the long tail), too.

More importantly, Netflix made the big decisions right. When Walmart and Blockbuster started to challenge Netflix, it lowered its prices and beat them. After extensive work, the company designed a small box that would allow you to stream movies to your TV. But then Netflix decided that selling the box would put it in the hardware business—which it didn’t want to be in—and would also force it to compete against its partners. So it spun the project off into a company called Roku. Instead, Netflix would let every hardware maker install Netflix software. Soon you could stream movies on your PlayStation, Xbox, TiVo, or just about anything else.

Now, however, Netflix looks screwed. This summer, for the first time, it wildly misread its users. It raised prices on its subscriptions, infuriating people, and then tried to separate its DVD-by-mail business into a new company called Qwikster, infuriating its customers even more. How can a company have so much data that it knows what movies people want to watch next, but not how much they want to pay? “I messed up. I owe everyone an apology,” wrote Reed Hastings on his blog.

For a brief moment, the waters calmed. But yesterday, in its earning call, Netflix announced that the past quarter was grim and that future subscriber growth will be much lower than anticipated. The stock is down fourteen per cent today and seventy per cent since the summer. In August, a share of Netflix cost sixty dollars less than a share of Apple. Now it costs four hundred and sixty dollars less.

It’s a bad time, too, for Netflix to have declining subscriber loyalty. The company believes that the mail-order-DVD business is finished, and that our DVD players are following our VCRs to the junkyard. So it is killing off that part of its business. Unfortunately, though, that’s the part with the high barriers to entry. It’s not easy for a startup to build massive warehouses and systems for mailing discs. It is easy, however, to get into the streaming business. Yesterday, for example, we learned of a startup called NimbleTV, which plans to let you watch all the channels you subscribe to through your cable provider on your phone or your tablet. If you had that, would you want Netflix, too?

Netflix fears that just distributing digital content is a mug’s game. Anyone can move bits around, which means that the price for doing so will just keep dropping. So it’s trying to create its own original content. But, so far at least, it’s not very good at doing so. “Lilyhammer,” a mobster show that Netflix introduced in January, has gotten killed by reviewers; I gave up on the first episode after fifteen minutes of mediocre acting and clumsy dialogue. Early next year, Netflix will release a new season of “Arrested Development,” which will surely be better. But the company is in an odd spot, facing the same competition problem it avoided when it spun off Roku. If its shows are bad, it’s embarrassing. If they’re good, they could irritate partners. Netflix needs content from AMC, for example. But will those negotiations get harder once Netflix is creating its own shows to compete with “Breaking Bad” and “Mad Men”?

Can Netflix pull through, or will it just continue to decline until it, and all its data, gets gobbled by Amazon? Out of a sense of loyalty to red envelopes—and to elegant algorithms—I hope the company figures out how to thrive again. But it won’t be easy for Netflix to find a way to fend off its new competitors while keeping its old partners happy. Perhaps Reed Hastings should offer another million-dollar prize … to someone who can figure out a new business model.

http://www.newyorker.com/online/blog...#ixzz1t0YUPv9o

**bruceames** · 04-24-2012, 07:00 PM

Quote:

Originally Posted by PSound

I think you have it dead wrong.

Netflix is milking and nurturing the DVD side. Just take a look at the drop in DVD margin in Q1. They are obviously investing in that business.

The problem is not Netflix wanting to make money from the business. The issue is that consumers are moving on from OD. You can see it in absolutely every metric. Both consumer sell through and rental revenue are declining. Netflix is wisely using this time of decline to build other growing markets. It is called good business.

Lack of marketing, intent to rename it "Quikster", removal of DVD queues in streaming menus, making it impossible to sign up for DVD service only (which they later changed), calling themselves a streaming company to the exclusion of DVD, not maintaining inventory levels, etc.

All the signs that they are treating DVD like an ugly stepchild are plain as day. Whether you choose to acknowledge those signs are up to you.

PSound · 04-24-2012, 07:01 PM

Quote:

Originally Posted by bruceames

Lack of marketing, intent to rename it "Quikster", removal of DVD queues in streaming menus, making it impossible to sign up for DVD service only (which they later changed), calling themselves a streaming company to the exclusion of DVD, not maintaining inventory levels, etc.

All the signs that they are treating DVD like an ugly stepchild are plain as day. Whether you choose to acknowledge those signs are up to you.

Correct me if I am wrong, but didn't you assert that they made positive changes to the DVD program that would result in improvement in Q1?

04-24-2012, 02:18 PM	#62
Dave J Destination: Danger! Join Date: Jun 2008 Posts: 379	Reviewing the quarterly results just makes you shake your head over the eagerness of Netflix to kill off their disc business. Why the heck they don't nurture that incredibly profitable side until the conclusion of its natural lifespan is beyond me.

04-24-2012, 04:09 PM	#65
h0mi High Definition is the definition of life. Join Date: Aug 2007 Posts: 348	They must be worried about the impacts to the mail order business once those postal service cuts/postage increases takes place (which reminds me, wasn't it supposed to be in April that saturday delivery went poof? ) They have a huge leg up in terms of digital distro- apps on pretty much every device out there.