Netflix (NASDAQ:NFLX) was once a high flying growth stock that seemed as if it would rise and continue to rise. Then, CEO Reed Hastings made the critical error of raising prices and changing the product plans. Netflix customers were enraged and ultimately dropped Netflix and turned to Coinstar’s Redbox kiosks which have been a hit. Unfortunately, Netflix has been unable to regain its leader status and is now forced to work with competitors in order to keep business operations going.
According to a report by Reuters, Netflix CEO Reed Hastings has been secretly meeting with the largest US cable companies in recent weeks to discuss adding Netflix to cable packages. If some sort of a deal materializes, then you could see Netflix on Comcast and Time Warner as a pay-TV option. However, analysts see this as competition now with HBO which could significantly hurt profit margins.
Overall, analysts are iffy on this idea of a partnership deal. On one hand, assuming Netflix would not consume bandwidth that is charged for monthly by cable companies, then customers would be more likely to spend that little extra money to get a whole lot more of content right on their TV. The downside of this potential deal is Netflix would have to give up a portion of its sales which will cut into the bottom line and could hurt the company. As of now, Netflix’s streaming services are posting horrible margins and its DVD sector is even worse. However, the company is planning on selling off its DVD business. Another downside is that Netflix is unlikely to gain a huge amount of subscribers to make a big difference which could ultimately lead to a takeover of Netflix by a cable giant.
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It seems as though joining forces with a cable giant will only lead to its demise. The deal would cost too much of Netflix’s profit for one thing and it could ultimately lead to a takeover. In that takeover, the cable company would most certainly skew Netflix and take advantage of it. That is not an outcome Netflix is looking for.
Netflix is in a tough spot. Redbox has taken over as far as DVD rentals goes and streaming movies is not something that customers are interested in right now. They feel betrayed by Netflix for raising prices and changing the plans. Hastings sure has put a huge dent in his reputation. Quite frankly, I am surprised that he is still CEO considering he single handedly destroyed Netflix.