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Netflix Q1 Results - Loss of another 1 million Disc Subs

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Old 04-23-2012, 09:33 PM   #31
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What ever gains they make from streaming, they lose more from the reduction of Disc Subs.

This past quarter = loss of $33M

Last edited by Lee Stewart; 04-23-2012 at 09:37 PM..
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Old 04-23-2012, 09:38 PM   #32
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Originally Posted by bruceames View Post
Not really a theory, but pure unadulterated BS.
What Lee is stating is a straw man, as no one stated that each new sub was equal to 100% contributing profit.

What others were asserting was that margins for streaming were poor on a per user basis, and that was the nature of the streaming business (the general assertion being costs rose linearly with new subs - AKA a variable cost model).

What was clarified was that margins improve dramatically with each incremental subscriber due to the fixed cost nature of the streaming business.

That has been proven without any doubt. As Lee illustrated against his own argument, margin for new subs was 50%. Significantly higher than the mean margin for streaming. And that is because costs are NOT variable per user (AKA - they are fixed cost).


And that trend looks to be continuing quarter over quarter with new subs being so high margin that the entire segment went from 11% margin in Q4 to 13% margin in Q1 with expectations of 15% contribution margin in Q2 improving by 100 basis points each quarter for the remainder of the year.

Sorry Bruce, but you are wrong here. New subscribers are significantly higher margin due to the fixed cost nature and the numbers prove it unquestionably.
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Old 04-23-2012, 09:38 PM   #33
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Pretty good read at The Wrap.

Its a bit more pessimistic than other assessments I have seen but it places some of the issues into perspective including the box Netflix has placed itself in for the price point for streaming at $8 a month and their need to keep gaining subscribers to generate revenue from streaming since they really can't raise the price on their SVOD plans right now since the issues they had in 2011.


Quote:


That Big Netflix Comeback? Looking Less Likely



Netflix’s stock plummeted in after-hours trading on Monday, revealing persistent unease about the future of the company and doubts about the viability of its business model.

Once the darling of the home entertainment industry, the company has had a brutal year, thanks to a series of major missteps in its attempt to transition from discs to streaming.

The negative response to a better-than-expected earnings report didn't do anything to dispel worries that a major bounce-back remains elusive.



With its subscriber base not growing as some had hoped, CEO Reed Hastings (pictured below) continues to bank a recovery on an expansion internationally and investment in more original programming, like the upcoming highly anticipated revival of "Arrested Development."

But those cost money, which, without ad revenue, necessitates a constant and robust influx of new subscribers.

Currently, Netflix boasts 23.4 million domestic subscribers. Another 3 million are international.

Netflix’s current share price “is based on some unsustainable growth view that it can grow 6, 7, 8 million domestic streaming subscribers a year,” Michael Pachter, an analyst with Wedbush Securities, told TheWrap.

“They have to believe there’s a greater fool out there who’ll take whatever crap Netflix throws at you. But there are not many millions more of those people.”

When Netflix’s earnings call on Monday opened with a question about its subscriber projections, the company estimated 7 million for the year. Yet while it added 1.7 million domestic subscribers in the first quarter, its projection for the second quarter was underwhelming: fewer than in the same frame from 2010.

Trouble is, analysts want to see continued growth, not a decline. If the numbers are going down, how are they getting to 7 million by year’s end?


Hastings and Wells said growth figures were consistent with “historic patterns” and talked a lot about subscriber growth being seasonal.

When TheWrap followed up with Netflix spokesman Steve Swaysey, he said much the same thing, adding that the second quarter is usually the worst for adding subscribers.

Then why did the company’s stock price fall?

“The business is growing," he said. "We had a terrific quarter, but some people did not fully understand the seasonal metric we provided.” Translation: It's everyone else's fault.

Make no mistake, Netflix’s future is about that subscriber number.

“If they can get incremental subscribers, it can be a highly profitable model, but it’s hard to predict quarter to quarter,
” Aaron Kessler, an analyst with Raymond Jones & Associates, told TheWrap.

Kessler believes the peak on subscribers is 40 million. That’s a far cry from the 60 to 90 million Hastings has said Netflix could attract.


One reason Netflix’s growth may hit a wall is the rise of challengers. Hulu and Amazon both stream movies and TV shows -- and Hulu actually offers in-season shows, not available on Netflix.
What's more, Hastings said on Monday he still expects Jeff Bezos & Co. to launch a standalone streaming service.

Adding to the competition, Verizon and Coinstar, owner of Redbox, just announced a partnership that many see as a threat.

Meanwhile, Netflix’s partners in all of this – the studios – continue to demand more to justify handing off their libraries, forcing renegotiations such as the one that caused Netflix to lose its massive deal with Starz. That deal included a large number of Sony films.

Pachter says Netflix has to raise the prices for its streaming service to work. “Their business model is broken because they have ordained that the price you will pay for unlimited streaming is $8 a month,” he said.

And raising the prices right now is not an option.
Last time Netflix changed its pricing, trying to spin off the DVD business as a separate business called "Qwikster" -- last summer -- it spawned an animated consumer backlash that persisted as Hastings made a series of public-relations missteps.

“The brand is recovering well, but we still a ways to go," Swaysey said. As part of sustaining that recovery, Hastings said Monday that the company would not be raising prices.

The only choice left is to try to add subscribers, and with a growing crop of rivals, the company has to differentiate itself. Thus, the investment in original series, following in the footsteps of premium subscription channels like HBO and Showtime.

The first, “Lilyhammer,” a mob series starring E Street Band-er and "Sopranos" alum Steven Van Zandt, launched in February.

Coming up are "Arrested Development," with the original cast returning for 10 shows and talk of a several-season future; “House of Cards” from David Fincher, starring Kevin Spacey; and the Eli Roth-produced "Hemlock Road."

Of course, all of these take money to produce; without ad revenue, the company has to hope the offerings will bring in enough new subscribers to foot the bill. The company has so far refused to release any ratings on "Lilyhammer."

Another one of Netflix’s approaches is taking on the international market. It has already launched in the U.K., Ireland, Canada and Latin America.

Its paid international subscriber base grew by almost 1 million in the quarter, and analysts agreed that both Canada and the U.K. could be fruitful new bases. But Latin America has proven to be a bit more difficult.

“The odds of us building a large, profitable business in Latin America are very good, but it will take longer than we initially thought,” Hastings and Wells said in a letter to shareholders.

And these new expansions do more than boost Netflix’s cache. They cost money. To pay for that, the company needs more subscribers.

Sounds like we’re back at the start of the problem.
http://www.thewrap.com/media/article...ontinues-37227
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Old 04-23-2012, 09:44 PM   #34
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It seems though that the assumption that there is not a variable cost component to adding new Netflix streaming subscribers is just not accurate. That's probably due to needed infrastructure improvements or cost of content acquisition.

The numbers clearly indicate that its not a fixed cost to add a streaming subscriber there is a variable component to it as well.
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Old 04-23-2012, 10:32 PM   #35
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I agree that this sounds bad for Netflix with the loss of subs for disc rentals, but wouldn't that mean that it sounds worse for OD as a whole?
I am sure that Netflix is marketing and promoting the disc rental side of their business, but with content being what it is, who wants to rent crap.
Also why should Netflix gather blame for loss of subs when the studios have promoted, marketed, and sent out trailers to get the movie known to the consumers. If they couldn't get sales/rentals then how in the heck could Netflix step in and do better?
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Old 04-23-2012, 10:32 PM   #36
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Quote:
Originally Posted by PSound View Post
What Lee is stating is a straw man, as no one stated that each new sub was equal to 100% contributing profit.

What others were asserting was that margins for streaming were poor on a per user basis, and that was the nature of the streaming business (the general assertion being costs rose linearly with new subs - AKA a variable cost model).

What was clarified was that margins improve dramatically with each incremental subscriber due to the fixed cost nature of the streaming business.

That has been proven without any doubt. As Lee illustrated against his own argument, margin for new subs was 50%. Significantly higher than the mean margin for streaming. And that is because costs are NOT variable per user (AKA - they are fixed cost).


And that trend looks to be continuing quarter over quarter with new subs being so high margin that the entire segment went from 11% margin in Q4 to 13% margin in Q1 with expectations of 15% contribution margin in Q2 improving by 100 basis points each quarter for the remainder of the year.

Sorry Bruce, but you are wrong here. New subscribers are significantly higher margin due to the fixed cost nature and the numbers prove it unquestionably.
How can you have a "fixed cost nature of the streaming business" when they are adding new content all the time? Each time they add content, their cost goes up. The only thing that is "fixed" is the amount they pay per month/quarter/whatever over the term of the contract per content provider.

One more time - maybe THIS time it will sink in . . .

FIXED COST

Definition:

Quote:
A periodic cost that remains more or less unchanged irrespective of the output level or sales revenue, such as depreciation, insurance, interest, rent, salaries, and wages.
http://www.businessdictionary.com/de...ixed-cost.html

If you insist on using Accounting Terms, at least understand what they mean.
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Old 04-23-2012, 10:36 PM   #37
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Originally Posted by 1stSilverado View Post
I agree that this sounds bad for Netflix with the loss of subs for disc rentals, but wouldn't that mean that it sounds worse for OD as a whole?
I am sure that Netflix is marketing and promoting the disc rental side of their business, but with content being what it is, who wants to rent crap.
Also why should Netflix gather blame for loss of subs when the studios have promoted, marketed, and sent out trailers to get the movie known to the consumers. If they couldn't get sales/rentals then how in the heck could Netflix step in and do better?
What Netflix is losing in Disc Subs, Redbox is gaining in Kiosk rentals
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Old 04-23-2012, 10:37 PM   #38
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Originally Posted by Lee Stewart View Post
How can you have a "fixed cost nature of the streaming business" when they are adding new content all the time? Each time they add content, their cost goes up. The only thing that is "fixed" is the amount they pay per month/quarter/whatever over the term of the contract per content provider.

One more time - maybe THIS time it will sink in . . .

FIXED COST

Definition:



http://www.businessdictionary.com/de...ixed-cost.html

If you insist on using Accounting Terms, at least understand what they mean.
Oh Lee... Once again you provide the ammunition against your own argument.

You stated:

Quote:
The only thing that is "fixed" is the amount they pay per month/quarter
Fixed cost:

Quote:
A periodic cost that remains more or less unchanged irrespective of the output level or sales revenue, such as depreciation, insurance, interest, rent, salaries, and wages.

While in practice, all costs vary over time and no cost is a purely fixed cost, the concept of fixed costs is necessary in short term cost accounting.

Do you get it yet? As the amount they pay is fixed over the quarter (a time period), the Netflix streaming business is a fixed cost model.
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Old 04-23-2012, 10:40 PM   #39
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BTW... I already clarified the above the last time I tried to provide some education on the fixed cost model.

Fixed cost does not mean permanent, unchanging or forever. It means it is not variable within a period based on volume. Indeed, Netflix streaming is a classic example of a fixed cost model.
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Old 04-23-2012, 10:41 PM   #40
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Quote:
Originally Posted by PSound View Post
Sorry Bruce, but you are wrong here. New subscribers are significantly higher margin due to the fixed cost nature and the numbers prove it unquestionably.
Go look at the stat sheet again. Those "fixed" costs went up by $30 million.
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Old 04-23-2012, 10:43 PM   #41
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Quote:
Originally Posted by PSound View Post
BTW... I already clarified the above the last time I tried to provide some education on the fixed cost model.

Fixed cost does not mean permanent, unchanging or forever. It means it is not variable within a period based on volume. Indeed, Netflix streaming is a classic example of a fixed cost model.
Content costs can and do go up within a reporting period as well.
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Old 04-23-2012, 10:49 PM   #42
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Originally Posted by PSound View Post
Oh Lee... Once again you provide the ammunition against your own argument.

You stated:



Fixed cost:




Do you get it yet? As the amount they pay is fixed over the quarter (a time period), the Netflix streaming business is a fixed cost model.
No it isn't - it would be if they never added content . . . but when they do - their cost GOES UP.

It's as plain as the nose on your face - maybe that's why you don't see it!
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Old 04-23-2012, 10:53 PM   #43
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Go look at the stat sheet again. Those "fixed" costs went up by $30 million.
Different reporting period.

Again - FIXED COSTS DO NOT MEAN PERMANENT.

They mean fixed within a reporting period (not variable based on revenue within the reporting period).
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Old 04-23-2012, 11:00 PM   #44
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Content costs can and do go up within a reporting period as well.
Not on the basis of revenue/volume (added subs).


Bruce, you are a smart guy so I know you will be able to grasp this if you take a step back and understand what fixed cost actually means.

It does not mean permanent. It does not mean never changing.


The primary difference between the variable cost model and fixed cost model is that core cost of goods increase linearly (or close to it) based on revenue.

Apple cannot sell an iPad without producing it and paying those costs of goods. Those cost of goods (COGS) per item may vary slightly based on volume, but the basic premise of an outlay of COGS for each device sold means that overall costs are variable based on number of devices sold.

Each and every product requires a certain (more or less known) cost in order to generate the revenue. Costs go up more or less linearly based on revenues.


Variable cost means that costs do not rise linearly within the reporting period based on revenue. That is why each new sub generated margin multiple fold higher than the margin of base subs.
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Old 04-23-2012, 11:08 PM   #45
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Originally Posted by PSound View Post
Different reporting period.

Again - FIXED COSTS DO NOT MEAN PERMANENT.

They mean fixed within a reporting period (not variable based on revenue within the reporting period).


You CANNOT look at quarterly results as an "island unto themselves." They MUST be compared to past quarterly results. THAT is how Accounting and Finance work PSound.
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