The Basic Business Sense Netflix Bears Refuse To Grasp

| About: Netflix, Inc. (NFLX)
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The borderline acrimonious columns on Reed Hastings and Netflix seem to be approaching their January levels. One only need scan the NFLX headlines for the past week for some samples of writers demonstrating their emotional involvement. I'm not going to focus on the personal jabs but when one single column contains "charade"... "dog & pony show" "glorified bootlegger" "that's typical Hastings"... "creepy" - to describe Hastings and/or Netflix - maybe someone is getting frustrated.

To address the fundamental arguments in the aforementioned April 5th column by's Rocco Pendola titled Netflix Will Raise Prices, Rocco addresses what he calls "the issue of the company's one-tier subscription pricing scheme". He asserted that "Hastings absolutely knows this must change for Netflix to accomplish something greater than an inconsistent level of subsistence." He went on to say "even if the company was in a healthy financial position, it will still need to charge higher prices. At least if it wants to attract premium programming."

Two things that I would like to point out in this regard is that 1. Hastings is in the driver's seat in this regard. Rocco in the same piece acknowledges that as a customer, he would be willing to pay more. I don't think that is surprising to most customers. I would too, as would most people. It seems as though Hastings is wise to keep prices low as long as possible because the more people try Netflix (NASDAQ:NFLX), the more subscribers they will attract. The more they attract now, the more they will maintain even after raising prices - because it is the best service by far.

I recall being short General Motors (NYSE:GM) back in 2001. To the GM bulls I would point out tirelessly that they were giving the cars away with the high rebate incentives and that revenue didn't matter if they were making no profits. Nobody had a problem with that as they would continually point out to me that it was all about "market share"… I would counter that automotive sales are cyclical and the sales would eventually slow down because we were not talking about pancake breakfasts here .

With movies and TV entertainment, it -is- about market share. Netflix is not a cyclical. Hastings is gaining as much market share now and building an annuity for later.

2. Rocco continued…

Netflix will indeed introduce additional tiers that will cost more for premium programming like that which they currently offer in their DVD by mail service - and customers are getting ever closer to being ready for such additions. When Netflix pioneered the streaming service years ago, the technology wasn't ready, nor were the majority of customers. Now the technology and bandwidth is here and customers have affectively been "trained" to watch over the Internet whether it be on computers, televisions or portable devices. I am ready. I actually prefer to watch my entertainment that way. When Hastings created "Watch Now", the iPhone was a new invention, the iPad and the Android had not even been launched.

In regard to the content providers like Time-Warner (NYSE:TWX) launching their own services, they are deluding and perhaps hurting themselves. This is worse than in the old days of the movie palaces when the content creators all handled their own distribution through their own chains of theatres where customers had to go to the theatre owned by that particular studio if they wanted to see a film produced by a particular studio. Many decades later, I would say that the needs of the customer are far better met having theatres that can showcase films produced by independent movie theatres.

Independent theatres are a far more efficient means of distribution for the studios and the customer. With a studio owning the theatres, what happens if they have fewer successful films in a given time period? They have the same overhead but have fewer customers filling the seats. Realistically, there are so many monthly subscriber fees that consumers are willing to add to their challenged budgets. Therefore, regardless of the low overhead of a studio streaming all of their productions on their own, they are being short sighted in not realizing that millions of consumers will definitely not be subscribing to their unique services as they opt for the one that has the best service and the most content for their budget. We are not talking about an infinite amount of discretionary income here.

HBO produces -some- shows that I wouldn't mind watching and -would- watch if they were available on Netflix. I can tell you first-hand that I have no intention of subscribing to HBO GO or Warner Archives. They are fighting a losing battle and are being obstinate in their approach. They are penny wise and pound foolish as they aim for all of a small pie instead of some of an enormous (and rapidly growing) pie. The longer they do this, the more money they will lose to their competitors who -do- work with Netflix and face less competition from their isolated programming. The pressure is on them if they want to operate on the old studio-like system. These executives with their bright ideas will be culpable before their shareholders for losing out on the Netflix business at some point.

As for the "scheme" as Rocco calls it, when Netflix feels it has dominated the competition enough, it is a simple mathematical equation to determine what the number needs to be for the "all you can watch buffet" to work. Simple factoring of statistics that Netflix has at their disposal will show that some at the buffet watch more and some watch less than others on a monthly basis. Simple factoring will go into determining what the next tier needs to be to -profitably- allow streaming of newer content now being mailed by DVDs .

Netflix isn't setting out to map the human genome all over again. This has worked for the Chinese restaurant on every corner for decades. I wonder if they would be shorting the Hunan Gardens if they were public too? Subsequently, you don't see too many vacant Chinese restaurants in the pitiful commercial real estate market.

Netflix is simply giving consumers what they want and how they want it - simple and reasonably priced. I can't help but notice that the only people being bellicose about the Netflix model are Wall Street analysts and short selling (F)loggers. We all know from history that when the vast majority of the headlines are crying "bubble" and calling for the demise of any company or market, it is usually time to BUY.

Disclosure: I am long NFLX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.