Netflix Scrambles for Cash to Buy New Shows

Sorry, Netflix (NASDAQ: NFLX ) fans. Those of you who still were believers in
the video streaming and DVD subscription service after the ugly Qwikster debacle
might have to start looking for alternatives. Netflix agreed to sell $400
million in stock and convertible notes this week in what some are calling a
desperate effort to raise cash and purchase the online rights to more content.
The move indicates not just an urgent need to bolster its streaming video
catalog but significant cash flow issues for a company that once was seen as the
biggest growth story on Wall Street. That's a dangerous trend. Netflix is
caught in a Catch-22, where it has to spend mammoth amounts of cash to purchase
streaming video rights but has trouble bringing in revenue as subscribers get
frustrated with its stale video catalog. Consider the double whammy of the Starz
deal , which will end Feb. 28. Netflix is about to lose 7% of its online movie
catalog as the streaming video deal ends, but the alternative was to mortgage
the entire company to keep the agreement afloat. Netflix reportedly offered $300
million, but that wasn't enough to make Starz happy. Netflix now has created
an alliance with Technology Crossover Ventures, which will purchase $200 million
in convertible bonds debt that eventually will become NFLX stock and T. Rowe
Price (NASDAQ: TROW ) and its family of mutual funds will buy $200 million in
stock. The move is clearly meant to avoid the squeeze of a Starz deal again.
With the debt, Netflix can afford to make a big-ticket content partnership.
However, this is not a reason for consumers or investors to be cheerful. An
analyst with Wedbush Securities told Bloomberg this morning, "It's
essentially saying, 'We expect to continue to have cash-flow problems for a
long time.' It's a bad deal for shareholders and it looks desperate." In
short, Netflix is going to have to keep taking on big obligations like this to
get more content. If it doesn't, it will lose subscribers as its content
becomes less engaging and less current. This would be bad enough, but NFLX stock
still is reeling under the hubris of CEO Reed Hastings and his heavy-handed plan
to split Netflix into two separate companies. What's more, a small price
increase meant to fund streaming video deals in the same way as this recent
debt angered many customers and resulted in an exodus of 800,000 Netflix
subscribers. Shares are off 60% this year and down more than 75% from peak
valuations over $300 this summer. There are some who are hopeful for Netflix
still. There is a lot of growth potential abroad for Netflix , and there is
currency in the fact that NFLX was the "first mover" into streaming video.
However, as Hulu is considering an IPO and Amazon (NASDAQ: AMZN ) pushes
hardcore into the streaming space, it might only get more difficult for Netflix
to connect with both content providers and consumers alike. Jeff Reeves is the
editor of InvestorPlace.com. Write him at editor@investorplace.com , follow him
on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook . As
of this writing, he did not own a position in any of the aforementioned stocks.