Macquarie Securities analysts Tim Nollen and James Kopelman highlighted the challenges facing Netflix in a 35-page report that provides a glum assessment of the company's long-term prospects. The analysts asserted that Netflix's profit margins may never return to their peak levels, largely because TV and movie studios are demanding higher fees to license their content at a time when the company's subscriber growth has been slowing.
The slowdown has coincided with the rise of rival services from Amazon.com Inc. and Comcast Corp. offering households alternative ways to stream video over high-speed Internet connections.
Those market dynamics mean Netflix will have to find ways to pay the bill to obtain compelling content for its video library or risk losing customers, Nollen and Kopelman wrote. Netflix could bring in more money by coming up with new options that charge subscribers higher prices for the right to watch recently released movies. But changing from its current model of selling unlimited video streaming for $8 per month would also risk alienating customers.
Subscribers rebelled last year after Netflix raised its prices by as much as 60 percent for customers who wanted to rent DVDs through the mail in addition to streaming video over the Internet. The backlash triggered mash cancellations and a steep decline in Netflix's stock, price, which hasn't recovered from the pummeling.
Netflix shares fell $3.50, or 5.8 percent, to close Monday at $57.02. The stock peaked at nearly $305 14 months ago, right around the time the price increase was announced. The shares touched a two-year low of $52.81 last month.
Assuming Netflix doesn't raise its prices, the Macquarie analysts say the company will likely try to raise as much as $300 million through a sale of stock or corporate bonds. Netflix raised $400 million through the sale of stock and convertible notes last year.
Netflix, which is based in Los Gatos, Calif., declined to comment on Macquarie's report.
As an example of the tough choices that Netflix has to make, its service is relinquishing the rights to show several TV series from the A&E and History channels. The licensing rights to a list of shows that includes "Storage Wars," ''Ice Road Truckers" and "Dog the Bounty Hunter" are set to expire. Another 200 to 300 hours of programming previously shown on the A&E and History channels will remain in Netflix's library.
The entertainment trade publication Variety reported Netflix's impending loss of the A&E and History shows late Sunday, compounding investors' angst.
Netflix issued a statement indicating that its executives concluded some shows of A&E and History haven't been getting watched enough to justify their renewal.
"We renew programming that proves successful and generates viewing among our members and we expire those programs that do not," Ted Sarandos, Netflix's chief content officer, said in the statement. "While we do not comment on our deals and partnerships, expect some of the A&E and History programming to drop and some to remain on Netflix."