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Netflix is counting on its streaming business rather than DVDs.
GLEN STUBBE/MINNEAPOLIS STAR TRIBUNE
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By Troy Wolverton
San Jose Mercury News
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.
While both sides have a legitimate case to make, corporate raider Carl Icahn is betting on a rebound.
While they're at odds with Icahn, Netflix's managers--and some analysts--are optimistic about the company's prospects. The company is basically inventing what it calls "Internet television," getting smarter about how it operates 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's chief executive and chief financial officers, respectively, said in a letter to shareholders last month.
But other analysts and investors question Netflix's long-term prospects and its ability to ever resume the heady growth of the past decade. They see a company struggling to control the costs of its streaming business while an older but highly profitable DVD business withers 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 Icahn's move last week to take a 10 percent stake in it. Icahn said Netflix was undervalued and could be worth more if it were sold to another company. Netflix shares soared immediately after.
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.
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.
That decline is notable because even today--when it has nearly three times more U.S. subscribers to its streaming business than DVD subscribers--the DVD business still produces 40 percent more profit than its domestic streaming service.