Things are good at Netflix. Despite a deteriorating DVD rental market, rising gas prices and a glum economic environment, the company expects DVD mail rentals to grow for the next five to ten years.
Netflix posted a tidy profit of $26.6 million, or 42 cents per share, for the second quarter, ahead of Wall Street's expectations for earnings 40 cents per share. Meanwhile, other web-based businesses (well, Google) have given investors cause for concern.
No doubt, one reason for its upbeat outlook must be the fact that Netflix is almost entirely unaffected by gas prices. If anything, it's poised to benefit as increasing number of Americans cut back on gas expenses by staying at home and watching movies.
"There's no obvious correlation between the cost of gasoline and Netflix' expense structure," says Derek Brown, an analyst at Cantor Fitzgerald. "If the U.S. Postal Service reacts by raising postal rates, then that would have an impact [on Netflix]."
So far, though, Netflix seems to be in the clear. Late last year, a minor drama unfolded with the Office of the Inspector General suggested Netflix should be slugged with a 17 cent surcharge on DVD mailers to cover the USPS' trouble getting them through the sorter. Nothing came of it, though, and there's no indication -- so far -- that the U.S. Postal Service plans on raising rates next year -- even if their gas-related expenses are expected to increase by an additional $600 million.
But even if Netflix is insulated from a surge in gas rates, there's only so much it can do to grow revenue and profits. And it's not clear whether the market will absorb a subscription rate hike.
Over the last two years, Netflix subscription costs have gone down, but now the company is toying with the idea of raising prices for Blu-Ray services.
"I have no idea if the market will bear it -- that's why the company is not committed to higher pricing," says Brown. The assumption behind it -- that people may pay more for a higher-quality experience -- seems valid. It doesn't seem like they're trying to raise prices across the board, and history suggests that over the last two years, Netflix has significantly lowered pricing."
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