By Rex Crum, MarketWatch
SAN FRANCISCO (MarketWatch) — Calling Netflix Inc.’s business model “broken”, Wedbush Securities analyst Michael Pachter on Wednesday cut his rating on the video-streaming and rental company to the equivalent of sell, citing factors such as rising content-acquisition costs and continued loss of customers.
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Netflix /quotes/zigman/87598/quotes/nls/nflx NFLX -5.62% shares were last down more than 2% to $66 — missing out on a strong upsurge in the broad market that boosted the Dow by more than 400 points. Read Market Snapshot.
Pachter lowered his rating on the stock to underperform from neutral. In a research note, he wrote that the company’s business model “was broken when it raised prices for its hybrid customers, and continued customer defections will require it to invest ever-increasing amounts on marketing.” Read Rex On Techs column on how Netflix is suffering from its own arrested development.
The price increase was first announced in July and took effect in September, when Netflix began charging $7.99 a month each for customers to stream videos and also rent one DVD at a time. The move equaled a price hike of about 60%, as customers previously paid just $9.99 a month for both plans.
“The wheels came off with the price increases,” Pachter said, adding that Netflix’s pricing plans are “sharply limiting the attractiveness of the service to new customers.”
Netflix shares, which had reached as high as $304.79 in July, have fallen nearly 79% since the price change was announced.
Pachter added that Netflix is also facing a huge increase in the amount it will likely have to spend to acquire new video-streaming content, and estimates the company’s content-acquisition costs will balloon to at least $1.7 billion in 2012 from $800 million this year.
Netflix, which currently offers video-streaming services in the U.S., Canada and several South American and Latin American countries, is expanding into the U.K. next year. Pachter said he is concerned that Netflix seems to be willing to incur losses for all of next year in order to go through with its international expansion efforts.
“We think international subscribers will generate losses for the foreseeable future at a time when the company has alienated its most-profitable domestic customers with its sharp price increases,” Pachter said.
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