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KRT BUSINESS STORY SLUGGED: CPT-NETFLIX KRT PHOTOGRAPH BY GARY REYES/SAN JOSE MERCURY NEWS (April 6) Reed Hastings is CEO and founder of Netflix, the Internet movie rental service based out of Los Gatos, California. (cdm) 2005

Gary Reyes, Krt

Netflix faces challenges to reach 'Internet TV' dominance

  • Article by: TROY WOLVERTON
  • San Jose Mercury News
  • November 10, 2012 - 5:29 PM

Depending on whom you ask, Netflix is either a company that's poised for a remarkable resurgence or a washed-up has-been whose best days are behind it.

The company is basically inventing what it calls "Internet television" and is investing in international markets to position itself for long-term growth. "Internet TV is the future of television, and we are leading the charge," Reed Hastings and David Wells, Netflix chief executive and chief financial officers, respectively, said in a letter to shareholders last month.

But some analysts and investors question Netflix's long-term prospects and its ability to ever resume the heady growth it recorded for much of the past decade. They see a company struggling to control the costs of its streaming business while letting its older, but highly profitable, DVD business wither away.

Netflix's management is very clear about the company's strategy, "but I don't think it's a good one," said Michael Pachter, a financial analyst who covers the company for Wedbush Securities, adding that he sees only two paths ahead: It's either going to be "a high-growth, unprofitable business or a low-growth profitable one."

The future prospects of the streaming video company have been much debated in the wake of corporate raider Carl Icahn's recent move to take a 10 percent stake in the Los Gatos, Calif., company. Icahn said Netflix was undervalued and could be worth more if it were sold to another company.

Netflix's shares have been in the dumps since last year when the company stumbled through a succession of setbacks. It angered users with a price increase and a later-aborted attempt to sever its DVD business.

For optimists, the company's struggles are simply an indication of the challenging task the company has taken on: transforming its business from a largely subscription DVD service focused on the United States market to an international streaming video provider. They see a company positioning itself well in that new market.

Apps to watch Netflix videos are available on a range of devices -- from smart TVs to tablets to game consoles -- that its competitors can't match. Netflix subscribers are spending increasing amounts of time watching video through the service.

"When I look at the assets the company has, they are substantial," said Colin Dixon, a senior partner at the Diffusion Group, a technology research firm.

But critics question the company's strategy. Since retreating from its move to split off its DVD business, Netflix has allowed that service to decline rapidly. In the last year, the service has lost more than a third of its subscribers, and its quarterly revenue has fallen by $100 million over the last three quarters.

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