Looks bleak

NOT long ago Netflix was a stockmarket darling. The California-based firm transformed the video-rental market by renting out DVDs through the post, and by streaming films and television shows over the internet. On October 23rd, though, it announced an 88% fall in third-quarter profits and its market capitalisation, $15 billion in July 2011, shrivelled to $3.3 billion.

Netflix has been a victim of its own success. For about $8 a month, the company woos subscribers with programmes and films that normally require a pricey pay-TV subscription. Consumers love it: the average Netflix subscriber watches more than five TV shows and nearly three and a half films per week, according to a report from GfK Media, a market-research firm. But this threatens the producers of the programmes that Netflix rents out. Broadcast and cable networks earn a great deal more from licensing deals with pay-TV companies than they do with outfits such as Netflix—some $41 billion in 2012 with the former, against $3.5 billion with the latter. So any sign that Netflix is hurting a broadcast or cable network’s bottom line quickly leads to higher licensing fees or curbed content sales.

As if that were not enough, deep-pocketed copycats are chipping away at Netflix’s market share. Amazon is increasing its streaming-content library, most recently with a pact with Epix, a film channel. Networks and pay-TV companies are trying to create their own “TV Everywhere” services online. PC and tablet-friendly offerings such as HBO Go and Sky’s NOW TV are providing more video-on-demand options, including content that Netflix lacks or increasingly cannot afford.

It and other streaming services are responding by making original programming themselves. The company is working with directors such as David Fincher (who made “The Social Network”) and underwriting new episodes of “Arrested Development”, a show with a cult following. But producing new programmes is riskier than licensing existing ones.

Netflix’s deals were made on the assumption that the company would keep growing. It hasn’t. American subscriptions have slowed, and its international push has been wobbly. “They’re really going to have to pull a rabbit out of their hat,” says Brahm Eiley at Convergence Consulting Group.