High-Flying Netflix, Still High-Flying. Now What?

Everybody showed up in the town square for a big noisy shootout, and instead, they got a musical.

Well, it was something like that, anyway. Wall Street braced itself on Wednesday to hear Netflix CEO Reed Hastings intone the company’s fourth-quarter results. Certainly, a lot of the smart money said the online content delivery service was overdue for a comeuppance.

As Reuters reported on the morning of the Q4 announcement, there was some uncertainty: “The ratio of bearish put options to bullish call options in Netflix was 1.03 for the past 10 days, higher than 68 percent of the readings over the past year, according to data by Schaeffer's, suggesting protective buying has picked up in the days leading to its results.”

The bottom line, however, is that Netflix beat expectations all around, which still doesn’t mean that its stock price actually deserved to have increased a league-leading 295% over the last year. It’s a wildly hot stock. But it does mean Ol’ Red is doing all right —even if it more or less wishes those red envelopes would just go away.



Netflix reported that in the fourth quarter, it gained 2.3 million subscribers in the U.S., and 1.7 million more in Canada and Latin America. Net revenue was up, from $1.1 billion in the third quarter, to $1.2 billion. But net income zoomed to $48 million, from $32 million. Its stock traded sharply upward in after-hours markets, CNN reported.

What goes up usually goes down. I think the real saying is that it “always” does, but close enough here. Netflix will eventually come in for some tougher times as Amazon and Hulu continue to make inroads. But it’s also true that the more like services there are in a nascent market, the better off the biggest one does. Consumers, once they start consuming, can gorge themselves. (Fast-food restaurants don’t go where there aren’t any competitors. They go to the fast-food neighborhood.)

Wisely, Hastings told analysts yesterday he’d resist any across-the-board price increase for Netflix but that the company would probably add a kind of tiering. Right now, Netflix subscribers pay $7.99 for two simultaneous feeds and more for four.

Hastings indicated that for the company to grow, it might add some other kinds of options, but, importantly, not one where one class of user gets a better, larger selection of movies, say, or some other kind of exclusive content. That sounds like a wise move.

One of the hard truths of premium movie service business is that to some extent it really is a what-have-you-done-for-me-lately kind of operation. It’s harder for cable subscribers to quit HBO or Showtime because there are inducements, offered by real live, but usually bad, sales reps to stay put. Quitting Netflix is a lot easier because restarting it is, too.

In 2013, Netflix soared on “House of Cards” and “Oranges Is the New Black” and an extraordinary amount of good press as the media warmed to the cord-cutting story. The introduction of the cheap Chromecast dongle certainly helped.

The strategy for 2014: Keep doing that. It’s obviously way, way easier said than done.

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