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Netflix Latest Earnings Report Shows Trouble

Posted by David Merrell On July - 25 - 2012

    The beginning of the end may be at hand for Netflix. On Tuesday, the movie rental company posted its second quarter results, and they were not promising. While the company returned to profitability following a first quarter loss, Netflix had a 91% drop in net income. The company’s troubles began when it attempted to split its DVD by mail and streaming services, effectively doubling the price it was charging customers. External forces are now beginning to weigh on the company, and its doom appears to be within sight.

    The biggest challenge facing Netflix over the coming months is going to be competition and licensing fees. Three huge companies are competing against Netflix in the streaming arena, which has already surpassed its DVD by mail business. Amazon, Apple, and Google all offer streaming content as well. As movie and television studios began to demand higher licensing fees, Netflix will not be able to pay, while these tech giants will. Netflix will eventually be priced out of the market.

    The growth of Netflix has already slowed tremendously. In the past quarter, the company only added just over 400,000 subscribers, compared to 1.8 million in the same period last year. At the end of June, Netflix had 26.5 million subscribers overall in the US, and 30.1 million worldwide. The market is not even close to saturation, yet growth is crawling. It is not a good sign. Netflix is expected more weak earnings as it expands its overseas operations in the coming months. Those operations cost the company $89 million in losses in the second quarter.

    Even if Netflix manages to survive this troubled period, its future is bleak. It will eventually be priced out of the market by licensing fees, which are likely to sky rocket over the coming years. Amazon, Apple, and Google can afford to pay huge fees because they make billions in other ventures. Netflix will not be able to keep up. Just as big businesses have shut down mom and pop stores across the nation, these mega businesses are going to shut down little niche businesses like Netflix.

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