Questions For Netflix Ahead Of Earnings

| About: Netflix, Inc. (NFLX)
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Netflix (NASDAQ:NFLX) announces Q1 2012 results after the close on Monday, April 23. The company accepts questions for its conference call from any and all takers. Send a question to and there's a chance Netflix's VP of Investor Relations will relay it live to CEO Reed Hastings and CFO David Wells on the call.

Because the company has answered questions of mine before, I will submit the following for their consideration:

Can Netflix survive as a middleman? I define middleman as an intermediary between content owner and end user. Is the company's largely middleman status the reason for its apparent evolution to, at least in part, original programmer? How long do you think it will take to become a credible peer to HBO, which has had smash hit originals such as The Sopranos and Sex in the City?

For more than a year, I have used the middleman thesis as one of my primary arguments against Netflix. Why does Netflix need to exist, beyond being a purveyor of physical DVDs, when content owners can very easily distribute and monetize their most premium content to audiences across multiple platforms, leaving Netflix with, if anything,
the no longer valuable scraps?

It seems that content owners get this and are a longs way to coming
around. Look to the various TV Everywhere efforts and superior services like Time Warner's (NYSE:TWX) HBO GO for proof.

My only beef with the content owners is that they have not teamed up, as a wholly unified force, to make Hulu the one-stop shop for all of your streaming needs. Al a carte prices and a revenue share would make all of the front-line players, ranging from the cable and satellite companies to the content owners and creators happy.

But, even without a central hub like Hulu, disparate efforts can not only render Netflix insignificant, they can prove that the old guard's demise, particularly to the hands of Netflix, is little more than a pipe dream.

And, unless Netflix manages to glue together an original programming powerhouse on par with HBO in less than a year, concerted and fragmented old guard efforts will render them toast.

I must fully disclose something. While my own work and Netflix's upcoming earnings helped inspire this article, an excellent article by Tech Crunch's Jon Evans triggered it.

As a pretty big William Gibson fan, I was a bit embarrassed to have missed this quote, cited by Evans, from Neuromancer:

A middleman's business is to make himself a necessary evil.

And to think I could have been using that quote since last February.

I have about zero faith in Netflix's ability to make it as a middleman. Then the question becomes how can the company make itself a necessary evil? That leads me to my second question for Netflix IR that I hope will make it live:

William Gibson wrote (see above). Do you consider Netflix a necessary evil? If not, how can it achieve that status? If so, how can it enhance that status?

Netflix must have a concurrent plan B to original programming to make itself even remotely necessary for consumers and evil for the old guard.

Pandora (NYSE:P) provides the type of value add Netflix needs to create, cultivate and harness. The best (by far) personalization and discovery sets Pandora apart from other audio entertainment providers. While you can get the content Pandora offers elsewhere, you cannot get the same experience from other providers. The same goes for (NASDAQ:AMZN). It's not merely a place to buy stuff like Netflix is a place to watch movies and television shows you can get from any number of other sources. Instead, adds value from myriad angles, ranging from the Prime cult to Subscribe & Save to Kindle to the cloud and more.

My guess is that Netflix's contracts with content providers prevent it from getting too creative. A content owner probably does not want Netflix to monetize its content beyond the welfare price of $7.99 a month. This type of situation, operating under the assumption that this is how Netflix's licensing agreements get structured, underscores the lack of power Netflix has in this game.

If the company does not become a smashing original programming success in a fraction of the time it took HBO to build its empire, it absolutely needs to find ways to make itself more necessary as well as evil. That's a tough task, but if anybody is up to it, it's the guy who conceived the brilliant idea of DVD-by-mail while driving to the gym.

Disclosure: I am long P, TWX.

Additional disclosure: I am long NFLX June $40 put options.