Netflix short on cash, long on problems

Netflix, the embattled DVD rental and content streaming company, has found itself on hard times again.

Its shares tumbled on Tuesday following Monday’s announcement that Netflix would raise $400 million in cash by selling convertible notes and stock to T. Rowe Price Associates and Technology Crossover Ventures.

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Netflix made headlines in recent months by first deciding to hike the price of its plan that allowed for one DVD rental at a time and unlimited Internet streaming, up to $15.98 from $9.99 per month.

The company turned the screw further by creating a spinoff company called Qwikster that it said would handle physical DVD rentals, while Netflix would soldier on with Internet streaming only. It quickly reneged after customers expressed confusion and outrage. Netflix CEO Reed Hastings issued an apology email to subscribers, but the damage had been done — the company estimated that the move caused 1 million customers to drop their Netflix subscriptions.

Netflix has rolled out an agreement with Miramax to stream content in the United Kingdom and Ireland starting in 2012, but with the increasing cost of licensing copyrighted content, the company’s outlook isn’t good. 

Netflix does have 22 million streaming-only subscribers, but those increasing copyright costs paired with declining DVD subscribers point toward diminishing profits. “The DVD business, which is 80% of the profit, is starting to go away, and if there’s a thin margin on streaming, those two things go against one another,” Janney Montgomery Scott analyst Tony Wible told CNBC.

Caris & Company managing director David Miller said the move to raise money means “they’re sending a rhetorical signal" to Wall Street that the “PR nightmare” of Qwikster and the subscription hike is not over. "In a perfect world, they probably should have waited another couple of quarters and then decided [to raise cash], but you don’t know what market conditions will be like then," he said in an interview.