Netflix Reeling After Credit Rating Downgrade

Netflix, the DVD and Internet streaming behemoth has run into more trouble. After first upsetting its customer base this past summer by upping subscription prices by 60 percent, then splitting its business in two, then changing its mind, Netflix appears to have stepped into the mud again over its dubious financial dealings.

According to the Hollywood Reporter, Netflix decided last week to try to raise money in a stock-and-debt offering, which many saw as a risky move by a company that has seen its stock value drop by over seventy percent since announcing its price hikes. Because of that, the major credit rating agencies have downgraded Netflix to BB, which is worrisome because it set off alarms all over Wall Street putting Netflix's stock prices at even greater risk, and making it almost impossible for the company to raise the money it was looking to make to support its assertion that it will more aggressively pursue newer movies; something it's user base has been clamoring for since the company began streaming movies.

The problem, as Netflix sees it, is licensing fees. Back in the early days of its meteoric rise, Netflix was sitting fat and happy. All it had to do was drop DVD's into envelopes and send them to users. But then, other companies started offering movies streamed online, a direct challenge to Netflix's dominance. Netflix had no choice but to respond in kind, which it did, offering a streaming option for many of its movies. The problem though, was that unlike DVD's, streamed movies are subject to licensing fees, which can add up in a hurry when you start talking thousands of titles. Thus, when customers compared the number of moves they could watch on DVD, versus the streaming option, the offerings seemed rather paltry.

So, Netflix panicked and announced a huge price hike to help pay for licensing fees so it could stream not just more movies, but more new titles. In reality, the hikes weren't so bad, something like an additional seven dollars a month. Most subscribers spent that much on a tip for lunch. But they got angry anyway, because proportionally, it seemed like a lot. So, a lot of customers got mad and went elsewhere, causing a loss of confidence in the company, not to mention a drop in revenue, which led to the drop in stock prices and all the rest.

Where will Netflix go from here? Based on recent performance, it's hard to say, especially in light of the fact that even as Netflix is moving through its roughest patch ever, competitors are scrambling to offer streamed movies at a lower cost. Whether they will be able to build up a library large enough to compete with Netflix though, is anybody's guess.