Netflix glad 2011 over but 2012 may mean more pain

Wed Jan 25, 2012 2:37pm EST
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By Lisa Richwine

LOS ANGELES (Reuters) - Netflix Inc (NFLX.O: Quote) probably would like nothing better than to put 2011 behind it. But 2012 may be no walk in the park either.

Investors, who have pushed Netflix shares up 50 percent since late November, believe the company that revolutionized the home video industry may have plugged a torrent of defections after a widely excoriated price hike and a bumbling attempt to hive off its DVD-mail business as "Qwikster."

But it still faces a deluge of competition, a tarnished brand, and a costly expansion that will erode bottom lines, at least in the short term.

Netflix wants to steer customers away from DVDs and into its streaming business. To do so, it is writing hefty checks to add more movies and TV shows to its online service, and has warned that content costs will nearly double this year. At the same time, Netflix faces the loss of newer movies from Liberty Media Corp's LMCA.O cable channel Starz at the end of February.

"2012 is going to be a transition year," said Piper Jaffray analyst Michael Olson, who rates Netflix "overweight" and has a $100 price target on the stock. "The good news for Netflix is expectations have been ratcheted down quite a bit."

When the video rental company led by CEO Reed Hastings releases fourth-quarter results on Wednesday, all eyes will focus on whether the company has stemmed U.S. subscriber defections that helped spark a massive selloff last year.

Hastings, once a golden boy of Wall Street who could do no wrong, was forced to backtrack on the Qwikster name change and at one point apologized for "arrogance," but the damage had been done.

Netflix lost more than 800,000 U.S. customers in the third quarter of 2011 and warned that DVD-by-mail subscriptions would decline sharply in the final three months of the year, triggering the company's largest single-day share price plunge since 2004. But the company said total U.S. subscribers, which includes customers who pay for the online streaming service, would be "slightly up" for the quarter.   Continued...

<p>A sign is shown at the headquarters of Netflix in Los Gatos, California September 20, 2011. REUTERS/Robert Galbraith</p>