Netflix talks about repairing its brand…

February 13, 2012

Regular readers of footnoted know that we often joke about the Friday night dump — that 90 minute window on Friday evenings between the time that markets close and the time that the SEC stops accepting all but insider-trading related filings at 5:30 pm. So when we saw that Netflix (NFLX) filed its 10-K just 36 seconds before the SEC stopped accepting filings for the day, we assumed that there was probably something juicy inside.

What caught our attention was the new risk factor at the top of page 5:

If we are unable to continue to recover from the negative consumer reaction to our price change and other announcements made during the third quarter of 2011, our business will be adversely affected.

In the third quarter of 2011, we made a series of announcements regarding our business, including the separation of our unlimited DVD-by-mail and unlimited streaming plans with a corresponding price change for some of our customers, the rebranding of our DVD-by-mail service, and the subsequent retraction of our plans to rebrand our DVD-by-mail service. Consumers reacted negatively to these announcements, adversely impacting our brand and resulting in higher than expected customer cancellations. These adverse effects, coupled with the increasingly long-term and fixed-cost nature of our content acquisition licenses, will likely continue to have an adverse impact on our results of operations. While we have seen a return to growth in our core domestic streaming segment, we believe the process of repairing our brand will take time. If we are unable to continue to repair the damage to our brand, our results of operations, including cash flow, will be adversely affected.

What’s interesting here is that there were a number of seemingly modest tweaks in the language that Netflix had used in its prior filings (including a 10-Q that we footnoted in late October) that show that the problems created by introducing two plans to subscribers — one for streaming and the other for DVD rentals — are showing no signs of subsiding.

Of particular interest was the acknowledgement that the company needed to “repair the damage to our brand”. That’s the kind of frank statement that’s rare in SEC filings. It’s a seemingly subtle difference compared with the way that Netflix described the problem back in October when it talked about the need to “reverse the negative consumer sentiment toward our brand”. But we think it shows that the problem — and the damage — is much more significant.

Indeed, when we went and searched through Morningstar Document Research’s database (nâŸe 10KWizard), we couldn’t find a single example of another company talking about the need to “repair its brand”. Not even Coca-Cola (KO), which famously introduced New Coke in 1985 (though in fairness, Edgar only goes back to 1994 and disclosure wasn’t quite the same back then).

We found some other interesting things in Netflix’s 10-K that we’ll be sharing with footnotedPro subscribers later today. For more information about footnotedPro or to inquire about a trial, please contact us.

Image source: Technorati

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