For the first time in their eight-year history, Netflix (NFLX) subscribers declined in numbers for a quarter. As of the end of June, the company lost 55,000 customers from the beginning of April. The stock dropped by 7 percent on the news,and has already plunged by 38 percent for the year. It also downgraded its earnings for the rest of the year as well.
The great majority of the decline can be attributed to an aggressive campaign by Blockbuster (BBI) to gain market share.
For the second quarter in a row, Blockbuster has had subscriber growth, cutting in to Netflix's market share. Their model of allowing customers to return DVDs to the store and getting new ones caters to instant gratification, something Netflix isn't able to respond to.
When Blockbuster releases its results for the second quarter, they are expected to give an update on the number of subscribers they now have.
The problem for Blockbuster is they aren't making any money doing it. The first quarter they lost $49 million. In response they're talking about raising prices of their online service.
Netflix is hoping that's the case, as they're about to drop their monthly prices by a dollar in an attempt to get back some of their market share. Of course that will put pressure on their profits for the rest of the year. With them hoping Blockbuster increases prices, it shows a tremendous weakness in their business model.
Wedbush Morgan Securities analyst Michael Pachter says the competition has exposed the weakness of Netflix saying, "Netflix has a broken model. They aren't used to competition and now someone is competing against them very effectively."
I don't see where Netflix can go from here. They have enlisted celebrities and are buying up rights to movies, but that won't be enough to make a difference, even if it helps them a little in margins.
Netflix should end up with a profit of between $42.4 million to $52.5 million for the year.
Again, where do they go from here? They are stuggling with one competitor that probably over the long term won't even be substantial in comparison to the downloadable movies that are just around the corner.
If they stay in their core business alone, I don't see how they have can have a profitable future. With the "a projected growth of 68 percent expected overall through 2011," and the company losing 55,000 subscribers when it's just starting to take off, this isn't a good sign for the company. They're in big trouble to say the least.
It looks like they're becoming commoditized, and once that happens all they can do is compete on price. Competing on price alone will almost guarantee it doesn't have a future.
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