Is Netflix the next AOL?

It still has millions of subscribers, generates a decent chunk of cash and is reporting solid sales growth, but the warning signs are there. If Netflix doesn’t watch out, it could be the next AOL.

Netflix used to be Wall Street’s favorite momentum tech stock. Not anymore. Shares have plunged 52% year-to-date, and with good reason.

This isn’t a case of Netflix not being able to live up to lofty expectations. It is facing serious challenges. Hence the AOL comparison.

The significant price hike for customers that want access to both DVDs and online video streaming caused the faces of many consumers to turn redder than a Netflix envelope. Customers aren’t just taking to Twitter and Facebook to complain: They are actually cutting ties with Netflix.

Netflix announced Monday that it lost about 800,000 subscribers in the third quarter. That is terrible news for a company that investors had been buying on the hope that subscriber growth would continue for a long time.

Price hikes may be necessary to deal with drastically increased costs. Netflix has to find a way to justify the money it spends on content licensing deals if it wants to still be able to offer its customers the movies and TV shows they want.

Netflix also has ambitious growth plans internationally, and said earlier this week that it will lose money for the next few quarters as a result.

Netflix needs to get in touch with customers’ rage

It may also be the case that, for the long-term, it’s better (i.e. more profitable) to have fewer subscribers paying more a month than continually adding customers that only sign up for the cheapest plans.

But I can’t help think that the decision to raise prices so drastically — $15.98 a month to have DVDs and streaming is a 60% jump — is eerily similar to the moves AOL made in the early part of the 2000s.

Of course, prices hikes weren’t the only thing that hurt AOL. It languished for years as a subsidiary of Time Warner.

But just as AOL faced a major identity crisis while trying to morph from a stodgy 20th century Internet access company to a cool content provider — one that lasts to this day — Netflix also can’t figure out what it wants to be when it grows up.

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About SCB Enterprises
System Solutions and Integration

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