New Initiatives Beginning to Turn Netflix Around

By Maxwell Fisher - June 25, 2012 | Tickers: NFLX, TWX, DIS | 0 Comments

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Despite the struggles it continues to face in the stock market, Netflix (NASDAQ: NFLX) continues to focus on improving its services. Investors will still wonder, however, whether or not this will be enough to restore Netflix's business and credibility after the poor market performance. Netflix suffers from a long-term drop in the stock market, and analysts remain unsure whether it can recover from it. As experts question the company's future, investors are more wary of buying shares, but it still has a good chance of getting back on track. The company must deal with a rise in competition and issues with a recent lawsuit, but Netflix is still a company that has millions of users. With that in mind, it is worthwhile to investigate some of the upgrades and plans that Netflix has in order to retain its lead in the video streaming market.

Netflix made some improvements in its iOS application, which are being welcomed by smartphone users. Given the increasing popularity of mobile video streaming, this is an added point to Netflix. With these improvements, users will have an option to stream videos with Wi-Fi connection only, so as to avoid overage charges. It will surely make it easier and more cost-efficient for users to stream videos using their smartphones. Another new feature of the iOS application is the "do not share" option, which will prevent the automatic sharing of users' viewing activity on social networking sites.

The improvement in its iOS application should help counter the bad image Netflix is getting from a class-action lawsuit that has been filed against it. The company was criticized and accused of violating the Video Privacy Protection Act, as it held on to data about users for too long after they had already quit their subscriptions. Even if Netflix has agreed to delete this data and remove the policy, the lawsuit has dented the company's image. Customers want privacy. Knowing that Netflix used to keep old files, they will think twice about subscribing to the company's services. If more customers feel the same, Netflix's sales would fall, and its shares may never recover. This is the reason why it is trying to improve its image by introducing upgraded applications with features that ensure customer privacy.

Netflix also recently announced plans to use its own network for streaming videos to its customers. The initial reaction of investors in content delivery network (CDN) companies was characterized by surprise and a little fear. After all, some of these companies delivered Netflix's content to viewers. As a matter of fact, shares of Limelight Networks (LLNW), Level 3 Communications (LVLT), and Akamai Technologies (AKAM) all dropped after the announcement. The fall was short-lived, however, as the shares climbed after the initial surprise of investors eased. Limelight's shares rose 2.5% after a 12.5% drop, while Level 3 enjoyed a 2% jump, and Akamai saw a 4% increase in its shares.

Netflix said it will use its Open Connect software to shift to an in-house content delivery network. This seems like it would shake up the market, as it seems that CDN providers would lose profits from the leading video streaming company. Experts and stock analysts, however, have realized that it is not something new in the industry. In fact, Netflix's decision would not hurt CDN companies as much as expected. CDN providers have other services, and the biggest chunks of their revenues do not come from major companies like Netflix. Moreover, it will take several years before Netflix can transfer all its data from CDN providers to its internal network because it has to continue developing the software. Having an internal network might be a good step for Netflix, but this is only if it can ensure that its internal network is efficient. Otherwise, Netflix's entire operation would suffer because customers will be directly affected. This is what Netflix must watch out for as it carefully develops this service.

Another hurdle that Netflix has to overcome is its growing competition from HBO, a subsidiary of Time Warner (NYSE: TWX). While it is obvious that online movie streaming has become more popular than ever these days, HBO is not something that goes down easily without a fight. There is widening support from consumers who are calling on HBO to "take their money" so they can receive a standalone HBO GO streaming service. This development comes with the reviving popularity of HBO for airing the hit shows Game of Thrones, True Blood, and Girls. This is a struggle that Netflix may have to fight when the time comes. Although media analysts have said that cable TV viewing dropped by almost 10% due to the advent of online video streaming, cable TV companies did not stop growing in terms of revenue. HBO is something that Netflix should not take for granted. Time Warner stock should be positively affected by its increased ability to compete in this market, but I do not think this will impact Netflix much quite yet.

While HBO has been added to Netflix's list of competitors, Netflix might cross out Aereo from this list soon. Major TV companies are demanding the shutdown of Aero due to alleged copyright law violations, although the smaller online TV service company is defending itself against these accusations. Netflix and competitor Redbox- a subsidiary of Coinstar (CSTR)- are in agreement in defying Disney's (NYSE: DIS) new DVD policy. Both companies are affected by Disney's decision not to provide them with the rental copy until 28 days after its store release.

Despite the competition and issues it is facing, Netflix still has a strong chance of pushing forward. Investors should still be watching everything closely to make their decisions though. If its new initiatives are implemented successfully, Netflix's continuous decline on the stock market may be over. I think much depends on this success.

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