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Of all the spin and deflection that Netflix (NASDAQ:NFLX) has put out there in the last few months to distract everyone from the fact that the business model simply doesn't work (which has been well documented by my fellow contributor Rocco Pendola), Wednesday's press release is by far the most ridiculous. In case you missed it, Netflix informed the world today that its members watched over 2 billion hours of content in Q4, 2012, yes that's right, TWO BILLION HOURS!!! (Picture Reed Hastings impersonating Dr. Evil).

Now before you spray your drink all over your monitor from sheer awe and amazement, let's actually think about this. First off, this is not a number that Netflix has ever reported before, so there is nothing to compare it to. Apparently, "The Street Expectation" was a little over 1 billion total hours watched, but I can't find any report that cites this metric with an expectation attached. In other words, this is a made up metric; a meaningless statistic pulled out of thin air that just sounds impressive. If you don't believe me, go pull the quarterly and annual reports and search (ctrl-f) for the word "hours." The only times the word comes up is when Netflix is referring to increased costs associated with more streaming time per customer (more on that in a minute).

Next, let's actually look at what this implies about subscriber usage. This is 100 hours per subscriber (assuming they still have at least 20 million) over a 92-day period, so about an hour a day. Of course, Q4 also includes Thanksgiving and Christmas break, 2 extended periods of time where people are at home watching TV, especially children who have a lot of time off from school. Again, we don't have this number from Q4 2010 so there's nothing to compare it to or even analyze, which makes it utterly useless.

Let's pretend that 2 billion hours is a big increase from a prior quarter: that is actually not good news for Netflix. The reason is that Netflix incurs greater costs with more streaming hours per customer, while making the same revenue. In other words, if a customer streams more than they used to, Netflix loses more money on them than they would otherwise. This has been well documented on Seeking Alpha by contributors Rocco Pendola and Slim Shady, as well as commenter Milkweed, but no real "analyst" ever mentions it. Part of the costs come from their infrastructure costs. Netflix uses Amazon (NASDAQ:AMZN) Web Services for their streaming delivery, and that comes with fees based on usage. Also, some of the Netflix content deals increase in price based on number of subscribers and number of views. This is why the Sony (NYSE:SNE) movies vanished last June. Here is a direct quote from the Netflix 2010 Annual Report, page 27.

"In addition, content delivery expenses increased due to higher costs associated with our use of third-party delivery networks resulting from an increase in the total number of hours of streaming content viewed by our subscribers."

Here's another one from the Q2, 2011 report:

"Content delivery expenses increased $6.6 million primarily due to an increase in costs associated with streaming content over the Internet resulting from an increase in the total number of hours of streaming content viewed by our subscribers."

So not only is this 2 billion hour statistic completely meaningless without anything to compare it to, but if Netflix customers are now streaming more than they used to, it's actually a NEGATIVE for Netflix's already terrible income statement and their projected losses for all of 2012. Unless they actually gained subscribers, this is not a good development because it simply means Netflix is making the same money but the revenue is costing them more due to the heavier usage. So as hard as it is to believe that Netflix is now voluntarily releasing bad news and spinning it as good news, that's exactly what happened. What is not surprising, given the high level of misunderstanding that surrounds this stock, is that it worked.

Before the bulls attack and say "Well, they obviously increased subs otherwise how did they get 2 billion hours viewed?" I'd simply ask, why are they reporting hours viewed instead of an actual increase in subs, a number they know actually matters to this stock? This just tells me that Netflix does not have anything good to report, so they are simply releasing statistics that might sound impressive at first glance.

At the end of the day, this press release is pure PR spin by Netflix. They got what they wanted and the stock jumped 11% and put in a parabolic move on the hourly chart. Like all the other big moves Netflix has had in the last 3 months, this will be equally short-lived. Longs should be taking profits or using the spike to cut losses. Shorts should be staying strong and not covering, and using the opportunity to add on here or buy puts.

Source: Why '2 Billion Hours' Only Strengthens The Netflix Short Case