The Ba2 Corporate Family Rating (CFR) and Ba1 Probability of Default Rating assigned to Netflix by Moody’s is under review, and that ain’t good – the Wall Street watchers at Moody’s believe tighter margins and more competition add an element of shakiness to Netflix’s future.
“Moody’s review will focus on an evaluation of the unique risks faced by and growth prospects of each of its business segments – domestic streaming, international streaming and physical DVD rental,” said the analyis firm. “The review will assess the company’s shift from a high margin, partially variable cost DVD rental business to a low margin, primarily fixed cost online streaming business. We will evaluate the extent to which the growth in the company’s domestic streaming subscribers can offset the hastened losses of higher margin DVD customers, and assess its capacity to meet fixed streaming content obligations in the event of rapid subscriber declines in the face of competition.”
The costs and benefits of entering foreign markets and increasing competition in the US market will also figure prominently in the review.
Moody’s traces the company’s troubles to the moment it split its mail and streamed delivery services and raised prices for both. “This event impacted the company’s growth trajectory which may allow competitors time to catch up and puts more emphasis on the company’s increasing fixed content cost structure. Moody’s will evaluate in the review the impact of the company’s increasing investment in original programming, international expansion and changing product mix on its credit metrics and liquidity profile.”
On the plus side for Netflix is relatively low leverage, but Moody’s notes that the leverage level is moving in the wrong direction. Leverage and cashflow will also be part of the new review.
RBR-TVBR observation: Wasn’t it just yesterday when Netflix was hammering nails into the coffin of Blockbuster and other similar brick and mortar entertainment outlets? The company’s time at the top of the heap hasn’t been all that long, and already its modus operandi is under steady and effective attack. These are definitely tough times to be in business – any business.