August 14th, 2008
Netflix may lose $1.8M to $3.6M in revenue per day over outage
Update: Netflix has been facing shipping delays and outages in its distribution centers for the last two days and has been fumbling to find a fix. The company said Thursday that it is hoping to bring its systems online overnight. But the tab for the outage is roughly $1.8 million to $3.6 million in revenue a day, according to Citi analyst Tony Wible.
On Tuesday, Netflix disclosed that it has shipping delays (Techmeme). In a post, Netflix said:
We received and were able to process incoming DVDs this morning but, due to a technology issue, we weren’t able to send emails confirming DVD receipt and we won’t ship any DVDs today (Tuesday). Our goal is to resume shipping tomorrow (Wednesday). Members who should have been shipped a DVD today will automatically receive a credit to their accounts, which we will communicate in personal emails.
On Wednesday, Netflix recovered a bit and was hoping to ship from all distribution centers, but the company acknowledged “we are still experiencing technical issues with our shipping systems.”
On Thursday, Netflix continued to “to experience significant shipping issues.” The company said:
We were able to ship some DVDs from about half of our distribution centers yesterday but we haven’t yet been able to resume shipping this morning. Our engineers continue to work around the clock to restore normal operations. In the meantime, we’re notifying affected customers via personal email and we’ve posted a notice on the Netflix Web site. We’re as frustrated about this as you are and we once again apologize for the inconvenience.
These issues are obviously going to cost Netflix some dough. First, the company is losing revenue. That slippage will result in an earnings hit. Meanwhile, Netflix will have to account for reimbursing subscribers (currently credits to one-third of the subscriber base). Wible in a research note wrote:
Assuming only 1/3 is affected for one to two days, NFLX stands to forfeit nearly $1.8mm to $3.6mm in revenues (using a $13.36 ARPU), or roughly $0.007 to $0.015 in EPS. This assumes a 42.8% gross margin that gives some credit for the potential savings on the lack of disc shipments and postage; however, NFLX may see not savings if subs ultimately consume the same amount of content once the fulfillment issue is resolved.
Longer term, it’s unclear what impact this will have on the Netflix brand. I suppose that Netflix’s problems could be a win for Blockbuster, but it’s far too early to make that assessment.
It appears that Netflix is having a lot of problems getting its systems up and running. According to a 2004 Baseline magazine article Netflix runs on proprietary custom-inventory and customer tracking software.
Update: Netflix spokesman Steve Swasey said the company doesn’t “talk that much” about the company’s internal systems. But he did acknowledge that Netflix’s back-end systems are mostly home grown. “We developed a lot ourselves,” he said.
Update 2: Late Thursday Netflix said it planned to bring its shipments online overnight. In a blog post it noted:
By late this afternoon, we’d made enough progress on our system issues to begin shipping again from some of our distribution centers. We hope to bring the rest of our facilities back online overnight and be shipping from all of our distribution centers on Friday. But the issues we’ve faced over the last several days have been significant and there’s no guarantee at this point that our shipping operations will be fully restored by tomorrow.
Larry Dignan is Editor in Chief of ZDNet and Editorial Director of ZDNet sister site TechRepublic. See his full profile and disclosure of his industry affiliations.
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