Analyst: Netflix’s 2012 losses to be bottomless

Netflix’s rough year may follow the company into 2012. Wedbush Securities analyst Michael Pachter has come out with harsh criticism of the company’s billing and spending habits, believing even the most pessimistic appraisals of how it will fare in the near-future just don’t cut it.

Analyst: Netflix's 2012 losses to be bottomless

In a note accompanying a stock downgrade, Pachter beat on Netflix for an immodest September price hike aimed at hybrid by-mail DVD/unlimited streaming subscribers and a “broken” business model. The company “shot itself in the foot” with the 60 percent rate increase, he said.

“Any five year-old can tell when something isn’t fair, and raising prices on the DVD plus streaming customers only to acquire more content for all streaming customers wasn’t fair,” Pachter wrote.

Instead, the analyst argued that a smaller price increase of just $2 spread across each of the company’s subscription packages would have worked better – and infuriated fewer members – in the long haul.

“While some customers would have quit and others would have traded down, we estimate that the combined impact would have been only 10 percent trade down (2 million customers) and 10 percent quit (2.5 million customers),” said Pachter.

The resulting user base would have been comprised of 8-9 million single-plan and 16 million DVD/streaming subscribers, he concluded, adding that the additional $250 million Netflix would have earned still wouldn’t fully counter new content deals and expansion projects.

This fall, Netflix lost around one million subscribers over the wildly unpopular price hike. Tweaks to its website interface and the loss of popular content from Showtime and Starz also drew fire from agitated fans. And let’s not even get started on Qwikster.

Those hoping for Netflix and Starz to make nice may want to throw in the towel; it would do more harm than good.

“We don’t expect the company to renew the Starz deal, even on a time-delayed basis, simply because we don’t think that Netflix can afford it,” said Pachter. “Should we be wrong, and should Netflix renew Starz on a one-year delay at $200 million per year, its content costs will rise even more sharply than we have modeled, and its losses will accelerate.”

Pachter pegged Netflix stock to drop to $45/share. Currently, it sits at $67/share. (via Seeking Alpha / Home Media Magazine)