Will Netflix Sink or Swim?: Profits Increase, But Traffic & Subscribers Drop

By Anne Marie D. Lee, dealnews contributor

The battle of streaming video providers is afoot, and all eyes are on Netflix, though not for its movies, but for its quarterly earnings report. The DVD-by-mail and global streaming video provider recently announced second-quarter profits, emphasizing a return to profitability after a previous quarter of losses.

However upon closer inspection, the numbers that may matter most — namely subscriptions — suggest a more fallow than fertile second quarter. Netflix lost 850,000 DVD subscriptions in the second quarter, and gained only 530,000 streaming-video subscriptions. Not a reassuring sign of growth, especially in light of the 800,000 subscribers the company lost in 2011 after its price hike debacle.

Compounding the situation, last week Netflix endured a sizable drop in streaming customers who opted to watch the Olympics via NBC instead. Added to that, Netflix executives noted expansion plans in Q4 that may drive the company "temporarily back in the red." This news didn't leave much light at the end of the tunnel as far as investors were concerned. As reported in the New York Times, Netflix shares fell 16% on Tuesday and plummeted to 25% the next day. Can Netflix keep afloat as America's streaming service despite its bout of business troubles?

Netflix Plus: Will Exclusive Content Keep Subscribers Content?

While investors question its growth potential, Netflix continues to work at full throttle to expand its share of the market. In a joint letter to investors, Netflix Chief Reed Hastings and CFO David Wells detail Netflix's strategy to become the "world's most popular TV show and movie service" focusing on content acquisition and high-quality streaming.

The battle for content is the core of today's streaming video wars and Netflix's struggles to bolster its library of offerings have been well documented. Last week, rumor of a partnership between Netflix and HBO generated a lot of excitement, but was quashed the following day by an official HBO spokesperson. Realistically, an HBO partnership with Netflix would have most likely led to much higher Netflix subscription fees, which is not what consumers want. What they do want is stand alone access to HBO — and that's not going happen, not as far as Time Warner is concerned; it too wants to maintain its subscribers.

To that end, HBO now offers its own streaming service called HBO Go. This service provides HBO subscribers with mobile access to a wide selection of on-demand HBO programming. But Netflix, in turn, has emulated HBO's business plan and has created its own original content. Show's like Kevin Spacey's House of Cards and Hemlock Grove have strong star power. And the Netflix return of the cult hit, and former Fox sitcom, Arrested Development will surely garner viewership.

It's hard to predict how current entertainment demands will define future business models, but for now the proverbial game of thrones continues. Most would agree that Netflix's biggest challenge lies in streaming video, namely maintaining and expanding its content.

Other Streaming Alternatives Grow Stronger

In the meantime, viewers are embracing the Netflix's competition and the unique benefits that each service offers. Hulu Plus ($7.99 a month) has quickly earned status as the go-to place for watching recent TV shows. Amazon Prime members ($79 annual service) enjoy albeit limited, but free streaming of older and classic movies and filmz.

Amazon's pay-as-you-go offerings, too, are helping broaden the mega retailer's digital content scope. Rented titles are now available on the iPad via Amazon's app, but users can't purchase new titles in the app. Newcomer VUDU is another pay-as-you-go service that offers a limited number of movies in a variety of formats. This Walmart service is quickly gaining popularity, notably for its picture quality.

If any one thing is clear, it's that the streaming video battle is just surely underway. Whether any one service will ever reign supreme is difficult to discern as the competition keeps mounting; we'll just have to stay tuned to see what happens.

Is Netflix still holding your interest? What about cable? Should HBO go rogue and offer stand-alone access? How many services does it take to satisfy your movie and television fix? We'd like to hear all about your viewing habits in the comments.

Front page photo credit World TV PC
Photo credits top to bottom: TechnoBuffalo and Gadget Review

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I subscribe to the Netflix (streaming only). I agree that it is not the deal that it once was (when it included DVDs). A few shows that I watch are on Netflix and occasionally, I'll watch a movie. If it were not for the few shows I watch, I would cancel the service.

I'm not a subscriber to the Amazon Prime video streaming service, but I'm very impressed with the site's customer service. I would like for Amazon Prime to become a good value for me. The reason I don't subscribe to it is because of the streaming content and I would rather have a small monthly fee than a larger yearly fee.

Ocassionally, if I'm not able to rent from Redbox or watch on Netflix, I'll rent a movie from Amazon. Sometimes, I'm able to use instant video credit and I like their library. I would rent more often if it was a better value.
I used to rent Redbox with coupons..always free. Just got tired driving back & forth. With the price of gas nowadays and your time wasted concerning the dvd's "well being", it ain't worth it.

Count me in as one of the recent 530k conquest subscribers. As a movie junkie, even the albeit steep $7.99 monthly penalty, I think it's a fair price to charge by Netflix. Hope they NEVER raise it from hereon though...
isn't redbox $2/ movie? per night? and i have to drive to the store? and they don't have TV shows?
I have the Netflix  2 disc plan and unlimited streaming plan for about $18/ month. I average 7 DVDs/ month, plus 2 (maybe 3) stream movies/ month. That's $2 per movie, plus a bunch of TV shows, with out having to go to the store or pay late fees. Who else is can compare to that pricing? 
Absolutely agree. What were they thinking and they still don't get it.
Netflix is the best for actual discs, but as said before they hurt themselves when they changed there combined plans pricing when you also had the streaming. If they went back to better pricing when you take both services I believe they would gain back more of the market sure. If they dont and continue with what they are doing they will continue to lose market share. As I said offering both services together with better pricing then they have now will put them back on top.
They were definitely the pioneers of discs-by-mail and streaming, but the market ain't what it used to be.  They'll continue to be a solid player, but when they boosted their prices a while backed and ticked off their customers, they began a downhill slide that they never fully recovered from.  I think the company will continue to do well, but they're not (and won't be) the Wall Street darlings they once were.  They are still (IMO) the only real game in town for hard discs via the USPS, but they lost the market differential in streaming that they once had.