As of May 1, Netflix (NFLX)'s catalog of streaming movies is much lighter -- 1,794 titles lighter to be exact (see the list here). The titles range from "Caillou" to "Cruel Intentions" and belong to Time Warner (TWX)'s Warner Brothers, MGM and Universal. Instead, the movies are going to a service called Warner Archive Instant. The news comes roughly just over a year after movies from Starz (STRZA) stopped appearing on the service and may well be a preface to Netflix losing content from Viacom (VIA).
Netflix is a Dynamic Service
Netflix director of global corporate communications, Joris Evers, was quick to dismiss the change, explaining: "Netflix is a dynamic service, we constantly update the TV shows and movies that are available to our members. We will add more than 500 titles May 1, but we also have titles expiring, this ebb and flow happens all the time."
"We are selective about what's available to watch on Netflix. We often license TV shows and movies on an exclusive basis, so we can provide a unique experience. We'll forego, or choose not renew, titles that aren't watched enough. We always use our knowledge about what our members love to watch to decide what's available on Netflix. Our goal is to be an expert programmer, offering a mix that delights our members, rather than trying to be a broad distributor."
In the company's 1Q13 investor letter, sent out a couple weeks ago, it explained the reasoning: "As we continue to focus on exclusive and curated content, our willingness to pay for non-exclusive, bulk content deals declines. At the end of May, we'll be allowing our broad Viacom Networks deal for Nickelodeon, BET, and MTV content to expire. We are in discussions with them about licensing particular shows but have yet to conclude a deal. We continue to do lots of other business with Viacom around the world, such as our exclusive Pay1 deal for Paramount titles in Canada."
There is a bit of smoke and mirrors in those statements -- what viewer wouldn't want more choices? -- but licensing content costs money, and good content can cost quite a bit. As of last quarter, Netflix was continuing "to grow members and revenue faster than content spending," but if talks failed in renewing licensing agreements the company obviously felt that it would be unable to maintain that profitability.
I'm sure managing licensing issues is a fine balancing act, but Wall Street does not seem to be impressed. Right now, Netflix is down 1.4%, at $213.14 on a 52-week range of $52.81 to $224.30. The analyst consensus is that the stock will stand at $162.82 one year from now, and I can't say that they are wrong. The impending Viacom issues are bound to push the company's share price lower, at least in the short term -- but the future could be brighter going forward.
Even amongst the disgruntled, there will be many members who don't bother dropping Netflix because the basic price point for streaming service is so low at $7.99 per month, and it simply isn't had to find that much value. After all, it's about the same as a cup of coffee and a "New York Times" at Starbucks (SBUX).
In addition to providing a low cost service, Netflix is also making some solid efforts that are bound to appeal to multi-user homes. According to the 1Q13 investor letter, the company is developing ways for users to have a more customized experience. To this end, it has been testing a feature called "Profiles", which allows users to separate individual activities. This way, family members can have their respective tastes better served and receive more relevant recommendations.
Netflix is also looking for ways to better serve larger families. "A few members with large families run into our 2-simultaneous-stream limit. To best serve these members, we're shortly adding a 4-stream plan, at $11.99 in the U.S., and we expect fewer than 1% of members to take it."
Netflix is looking for ways to become more socialized, as well. "We expect to see more social discovery of content to watch, supplementing the existing taste-based techniques we have relied upon to date," writes the company. "We'll continue to test and innovate around social features."
Netflix may be able to pull itself up by the boot straps, but I wouldn't hold my breath. The stock is trading decently high right now, but it is going to decrease at least somewhat if the company loses Viacom. I say sell now while the stock is high, then buy back in after the price drops. I think Netflix may well turn out to be a winner in the long run, but it isn't going to happen overnight. There is plenty of room to make some money on the stock in the shorter term.