The share price of Netflix Inc. soared to $388.72, $54.99 or 16.48 percent increase over the closing price of the previous day. Its revenues and net profits are expected to be healthy, as the service adds 2.25 million domestic subscribers and another 1.74 million subscribers in foreign markets, finishing 2013 with 44 million subscribers. Some analysts expect that Netflix will have over 100 million subscribers in 5 years, while Wired magazine declares that Netflix will “rule TV after all,” highlighting the streaming service provider’s better-than-expected results. The market currently see a very bright future for Netflix. That, however, could quickly change, as Netflix CEO Reed Hastings indicated in a conference call on Wednesday.
On January 14, 2014, the D.C. Circuit Court of Appeals ruled that the FCC cannot impose Open Internet rules, based on net neutrality, in order to force internet service provider (ISP), such as Verizon or Comcast, to treat all traffic through their lines equally. In other words, if there is an internet service that uses heavy network traffic, like Netflix’s streaming video service, ISPs can charge higher price for traffic or hinder streaming services altogether by controlling traffic speed. Although the court’s decision does not take effective immediately, it certainly forced Mr. Hasting to address the issue during the conference call.
In answering to the first question related to net neutrality ruling, Mr. Hastings stated if major ISPs decided to block or hinder Netflix – additional regulations could stem from it. He added that in near future, he does not see any change from ISPs on network traffic to harm Netflix. He also implied that the DC court ruling on net neutrality will not affect the company’s expanding international business. On Thursday, his statement clearly worked to dispel a potential negative impact of net neutrality ruling on Netflix’s core business, as the stock priced soared even though the Dow Jones Industrial Average fell by 175.99 points. There are two things, however, that can still derails Netflix’s business.
In 2013, Netflix ventured into creating its own actual content, instead of streaming content created by others. In February 1, 2013, Netflix produced and streamed its first original show House of Cards starring Kevin Spacey and Robin Wright. The show was a commercial and critical success, bringing more people to Netflix and receiving nominations in the Primetime Emmy Award and the Golden Globe Awards. The second original Netflix show, Orange is the New Black, similarly performed well for the company. Both shows are gearing up for the highly anticipated second season in 2014. The issue is that its competitors will not sit idle when they see Netflix’s success of combining streaming service with original shows.
The biggest challenger is HBO, a subsidiary of Time Warner Inc. HBO has the arsenal of original content: Game of Thrones, Boardwalk Empire, Girls, True Detective, and many more. HBO has its own streaming video service, HBO GO, which as of now is only offered to HBO subscribers of cable TV networks. If HBO decides to offer a stand-alone streaming subscription service with original content, it can easily overwhelm the streaming video service market. Netflix is clearly aware of such prospect. Ted Saranados, Chief Content Officer of Netflix, stated back in February 2013 interview with GQ, advising Netflix is moving at lightening speeds to outpace HBO become a major competitor.
Another troubling aspect of Netflix’s business is that it now has over $7 billion of programming obligations. In addition, as it plans to borrow another $400 million for new programming. This fact has not escaped analysts in conference call and others. Mark Rogowsky, a Forbes contributor, cautiously points out some worrisome factors: zero “net cash” on the balance sheet, overpriced share value, and contest costs.
Netflix currently has a great business model with potential for further growth. And on January 23, 2014, the market responded with raising the Netflix share price by over 16 percent in spite of difficult path in its business plan that many analysts noted during conference call.
By Jonathan JY Jung