Netflix: The bad news keeps on coming

Netflix shares dropped 35% Tuesday, after reporting that it lost rather than gained US subscribers. At $77, stock is now down 74% from its alltime July peak, when it flirted with 300.

It’s down 70% since last April, when I asked:

How long can Netflix's luck last?
…
The Netflix mania reminds me of the TiVo mania five years ago. All manias reach a peak, but so far the Netflix peak is nowhere in sight.

I referred to “the reality distortion of the SV view of Netflix” — arguing that the enthusiasm for Netflix in the Bay Area might be atypical for Middle America. (A reader also pointed out that Netflix faces relatively low switching costs.)

On Tuesday, analysts downgraded Netflix shares. But why didn’t they downgrade them beforehand — particularly given the ongoing stream of bad news all summer — the ill-advised price increase and the (subsequently reversed) plan to split its businesses.

Some “experts” are now discovering that competition is possible in what has long been a commodity distribution business. As I said in July and again a month ago, that’s particularly true for electronic downloads.

Schmputerian pundit Holman Jenkins argues that all this bad news is good news for Netflix — even as he points out that Netflix has failed to win electronic distribution deals for 90% of the content it has one physical discs. He also argues that the price increases are necessary to pay ever-higher fees to access downloadable content.

Instead, he sees a silver lining out of 100 days of fiascos: a wounded monopolist (or rather monopsonist) is no longer as much of a threat to the movie industry, so perhaps they won’t gouge Netflix so bad in the future.

I see just the opposite lesson. The Netflix (and kiosk) businesses worked because with physical discs, the distributors could arbitrage the studio’s pricing to the sell-through market. For all-electronic content, there is no such gray market reasonableness restraint on studio greed, and so the studios will continue to jack up their prices until (it appears) we will never see a $10/month rental option again.

The fallout for that would be death for the pure-play distribution channels such as Netflix. BlockBuster (owned by Dish) might last a little longer, but is subject to the same pricing cartel. However, Amazon, Apple and Wal-Mart are all going to be around a decade from now — and can afford to be price followers in a commodity market with low switching costs.

The more serious question is how loyal are today’s millennials to full-length Hollywood content? Will they pay more for a Netflix (or equivalent) streaming subscription? Or will they just occupy themselves with free YouTube videos, as seems to be the habit of today’s teenagers?

Certainly any movie industry strategy that forfeits a generation of loyal listeners is as idiotic as ignoring (or suing) the Gen X’ers who were “sharing” MP3 files rather than buying CDs. We all know how that picture turned out.