Netflix has found itself in a difficult position. DVD subscribers are bolting the business, and although Netflix’s streaming service subscriptions are growing, it is not nearly fast enough to make up the difference. DVD subscriptions fell by 630,000 in the third quarter. Netflix said it might lose another 760,000 DVD subscriptions in the fourth quarter. The company has lost 2.56 million DVD subscribers so far this year.
The company added 1.16 million new U.S. subscriptions in its third quarter. This was well below expectations and further below Netflix’s goals for the year. Netflix now has 25.1 million streaming subscribers and 8.6 million DVD subscribers. The future of video rental lies in streaming, but margins for streamed video are much thinner than those for DVD rentals.
Revenues came in at $905 million and were in line with expectations. Net profits were reported to be $8 million, which was better than predicted. Netflix has about $709 million in cash on hand, but profits are being siphoned off by its growth initiatives. DVD rentals make up 90% of Netflix’s profits.
Customers have been complaining about the lack of selection at Netflix for some time now. It has become increasingly difficult for the company to obtain new content licenses. Netflix has lost some providers and has made weak or restrictive deals with others. Meanwhile, content licenses continue to get more expensive. Another reason why customers are leaving Netflix is that they can only stream on one device at a time unless they upgrade their membership.
Netflix could raise prices to help with content-acquisition costs and the costs of its international expansion, but then it would risk losing more subscribers to competitors. The barriers to entry in the streaming video market are relatively low. Netflix considers its main competition to be the major, low-cost, globally ambitious Internet subscription services. Over time, the already fierce competition will only get fiercer.
Netflix is facing competition from Amazon, Hulu, Apple, cable outfits, and Verizon/Coinstar’s streaming service. Many of the company’s biggest competitors are subsidized by other revenue streams to finance growth and acquisition costs, an advantage that Netflix does not have. This places Netflix in a precarious position.