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Wall Street Wants Netflix to Raise Rates
A Move That Could Backfire With New Competitors Looming
by Karl Bode Thursday 25-Oct-2012 tags: Video · business · alternatives · stats
Wall Street is urging Netflix to raise prices despite recent price hike disasters, and the threat of looming, lower-cost competitors. Netflix this week announced that the company added 1.2 million new US customers during the third quarter, bringing their subscriber total to 25.1 million -- almost a third of all homes with broadband. While the company is profitable, dominating the video market and growing, they missed projected targets, so investors pummeled the stock this week. The lower-than-they-had-hoped additions caused Morgan Stanley analysts to insist that Netflix needs to raise prices:

Netflix spends more on content as a percentage of subscriber revenue (62%) than cable networks, including: Discovery Communications (25%), AMC (34%), Showtime (35%), Scripps Networks Interactive (38%), HBO/Cinemax (48%) and Epix (58%), according to an analysis by Morgan Stanley. That indicates that Netflix’s $8-per-month Internet streaming service is too cheap, Morgan Stanley analysts Benjamin Swinburne, Scott Devitt Ryan Fiftal, Hersh Khadilkar and Andrew Ruud wrote in a research note Tuesday. "We believe the profit-maximizing strategy [for Netflix] is to raise rates rather than go for sub growth," they wrote.

The problem of course is that Netflix's subscriber numbers took a major hit when the company imposed a 60% rate hike earlier this year. It also ignores the growing threats from Amazon, HBO and the coming RedBox/Verizon joint venture, which is expected to undercut Netflix on price when it launches in a few weeks. For what it's worth, Netflix CEO Reed Hastings says there's no price hikes planned,

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kapil
The Kapil

join:2000-04-26
Chicago, IL

Amazon PIV...

...the closest competitor is around $6.50/month and that includes the video streaming, kindle lending library and the free two day shipping. Wall Street is on crack.
--
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EdmundGerber

join:2010-01-04
kudos:1

Re: Amazon PIV...

We all know how competent Wall Street is, don't we? They are to the 21st century what the catholic church was to the dark ages....

NormanS
Premium,MVM
join:2001-02-14
San Jose, CA
kudos:9

Re: Amazon PIV...

said by EdmundGerber:

We all know how competent Wall Street is, don't we? They are to the 21st century what the catholic church was to the dark ages....

The "Dark Ages" weren't so dark, and the Catholic Church copied and preserved a significant amount of ancient learned writing. None of which applies to Wall Street competence, or lack thereof, in any case.
--
Norman
~Oh Lord, why have you come
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DownTheShore
Stronger Than The Storm
Premium
join:2003-12-02
Beautiful NJ
kudos:12
Reviews:
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The lower-than-they-had-hoped additions caused Morgan Stanley analysts to insist that Netflix needs to raise prices

This is why the country is in the fix it is in now - companies listening to Wall St. analysts instead of their own consumer market. Profit is good, sure, but investors' returns should not be the only thing that drives a company's actions - they are responsible to their employees and to their customers, too.

I'm an Amazon Prime subscriber with a Roku box, who's been looking into Netflix. Right now, the price is attractive because it is relatively competitive. If they raise it? Then no, I won't even bother considering because the value to me just won't be there.
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spewak
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Re: Amazon PIV...

said by DownTheShore:

I'm an Amazon Prime subscriber with a Roku box, who's been looking into Netflix. Right now, the price is attractive because it is relatively competitive. If they raise it? Then no, I won't even bother considering because the value to me just won't be there.

Well said.
In addition, Netflix has lost the right to stream from quite a few content providers, further weakening Wall streets notion that prices need to be raised.
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en103

join:2011-05-02

Re: Amazon PIV...

Wall Street wants them to raise the price so that they'll slow the flood from traditional cable/satellite.

Snakeoil
Ignore Button. The coward's feature.
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Re: Amazon PIV...

said by en103:

Wall Street wants them to raise the price so that they'll slow the flood from traditional cable/satellite.

This sounds more like it.

Also consider the impact Netflix has had on Itunes.
Amazon would also win.
Redbox.
Vudu.
Hulu.
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XANAVirus
Premium
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Well said!

AnonFTW

@reliablehosting.com
said by kapil:

...the closest competitor is around $6.50/month and that includes the video streaming, kindle lending library and the free two day shipping. Wall Street is on crack.

And how many devices can you view it on?
firedrakes

join:2009-01-29
Arcadia, FL
wall street very smart at times and whole lot other times dumb as.......

BF69
Premium
join:2004-07-28
Camden, TN
said by kapil:

...the closest competitor is around $6.50/month and that includes the video streaming, kindle lending library and the free two day shipping. Wall Street is on crack.

Difference is you have to pay $80 UPFRONT and the library has even less content that Netflix. 2 days free shipping is not a big deal to me.

Beans

@dtcc.edu

No...

They better tell wall st to shove it.
brianiscool

join:2000-08-16
Tampa, FL
kudos:1

Netflix`

The video quality is not even near Blue ray qualitiy. All we need is someone to offer better codec and quality videos. Then Netflix is out the windows. Oh, yeah also lower rates.
osravens

join:2011-01-26
Cumberland, MD

Re: Netflix`

I'd say about 1% care about video quality. Do you see the crap people watch on Youtube?

Content will drive a switch from Netflix, not 1080p. Remember how many people are watching awful SD on those HD LCD's they have.

Metatron2008
Premium
join:2008-09-02
Stockbridge, GA

Re: Netflix`

The crap people watch on youtube is FREE
osravens

join:2011-01-26
Cumberland, MD

Re: Netflix`

The crap they watch on MTV and some of the other cable channels isn't.

The reality is people don't care that much about HD. More of them complain about how it costs more than actually have it. Very few people care about image quality anymore, and that comes down to the grainy crap they've become used to on Youtube.
brianiscool

join:2000-08-16
Tampa, FL
kudos:1

Re: Netflix`

I have that Youtube add-on that forces all videos to HD. I got to see the videos at 720p or forget it.
osravens

join:2011-01-26
Cumberland, MD

Re: Netflix`

Maybe you do, how many people do you think are adding plug-ins to their browser or even know what a plug-in is?
brianiscool

join:2000-08-16
Tampa, FL
kudos:1

Re: Netflix`

Very small amount of people. I hope they learn and demand better quality.

JackKane

@covad.net

Re: Netflix`

Cat Videos! Now in SuperVision!

Demand better quality from a site that allows any user to post any video they made? You're hilarious.
jjeffeory

join:2002-12-04
USA
The reality is YOU don't care that much about HD, or people in Cumberland don't care about HD.

Plenty of us care about video quality. Oh, and who watches MTV anymore?
brad

join:2007-09-06
Etobicoke, ON

Re: Netflix`

So true.

djdanska
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said by osravens:

I'd say about 1% care about video quality. Do you see the crap people watch on Youtube?

Content will drive a switch from Netflix, not 1080p. Remember how many people are watching awful SD on those HD LCD's they have.

And netflix's quality isn't that bad either! Watching netflix hd on my bedroom 27 inch is very similar if not the same quality as live hd from cable. (it's 27 inch, i get that but still, this isn't 480p or anything here)
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brianiscool

join:2000-08-16
Tampa, FL
kudos:1

Re: Netflix`

That is really a small T.V. Mine is 42 inch and I will notice the quality big time.

djdanska
Rudie32
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Re: Netflix`

My sony 41 inch you could barely notice. Granted, this was on time warner, When i had mediacom it looked like crap.
This was on my roku. My tivo premiere apparently uses a different video stream or codec or something cause it looked horrible on all my tv's.
osravens

join:2011-01-26
Cumberland, MD
I have a 46" Samsung HD and streaming through a PS3 is often better on Netflix HD than cable.
amungus
Premium
join:2004-11-26
America
Reviews:
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Re: Netflix`

I wonder what device the quality looks bad on...
HD on consoles, from what I've seen, is about the best it gets. Indeed, I have seen some cases where it easily rivals some cable/sat. quality.

Even though it's "4th gen" level compression, at a lower bitrate than MPEG2-HD, the content appears to be done with quality in mind, with several passes of encoding - the result is fewer artifacts than MPEG2 based content, which can result in a nicer quality, even with lower bitrate than would be preferred.

In any case, I think people get all upset too easily about this stuff.

It used to be about $10/mo. with 1 DVD /mo.

If they went to $9/mo. I doubt people would care much. Would sure be nice if they got a bit more content though. I haven't even used my Netflix streaming much in the past few months. Very close to considering cancelling it, as I just don't use it much, but it is nice to have it there from time to time.
jjeffeory

join:2002-12-04
USA
That says something about your cable company: The PQ isn't very good.

My choices are Comcast and FiOS. I have Comcast at another location and it is terrible compared to streaming and FiOS.

Look like you many have Atlantic Broadband. I have no idea how they are.
jjeffeory

join:2002-12-04
USA
What I've found is that Netflix quality is different from one device to another too. It looks better on my TV app and my PC than it does on the Xbox360. All are on the same FiOS connection with the same TV, but the video quality is different to my eyes.
jjeffeory

join:2002-12-04
USA
To be fair, the stuff that's on Youtube is crap... I expect better quality when I'm paying to watch something.

Cheese
Premium
join:2003-10-26
Naples, FL
kudos:1
For 8 a month, what do you honestly expect?
brad

join:2007-09-06
Etobicoke, ON
said by brianiscool:

The video quality is not even near Blue ray qualitiy. All we need is someone to offer better codec and quality videos. Then Netflix is out the windows. Oh, yeah also lower rates.

Netflix whitelists certain devices to have 1080p vs 720p content which is annoying when you have a device that can play 1080p content fine except for Netflix, but what is considerably more annoying is the whitelisting of 5.1 sound vs stereo.

BF69
Premium
join:2004-07-28
Camden, TN
said by brianiscool:

The video quality is not even near Blue ray qualitiy. All we need is someone to offer better codec and quality videos. Then Netflix is out the windows. Oh, yeah also lower rates.

$8 to rich for your blood. Netflix content problem is directly tied t the fact they only charging $8 a month. $8 X 25 mil customers X 12 months = $2.4 billion a year. Even if 100% could be spent on content it's not enough.

As far as video quality? Blu-ray is 40 Mbps. Hell even my internet connection is only 30 Mbps. Also most of us have caps. At 40 Mbps that would use 17.5 GB per hour. My 250 GB cap would be gone in 14 hours.
osravens

join:2011-01-26
Cumberland, MD

Typical Short-Sighted Wall Street

Let's cash in for ourselves, the company be damned.

So growth is sluggish and you want to RAISE prices? Yes, this is logical. This will really help Netflix perform better and get more customers.
daake07

join:2011-06-28
Kearney, NE

I agree with you Karl.

I think we all saw what happened after the first tried raising prices and their stock got pounded back then. They walk a very fine line with their pricing and I they know that. I personally do not use Netflix any more and I know many people who have gotten rid of it in the past year.

If I want to watch movies I use Redbox and for TV shows I will DVR them. There are very few TV shows that I need to watch that badly.

Linklist
Premium
join:2002-03-03
Longport, NJ
kudos:5

1 edit

Raising prices could be deadly for Netflix

Amazon & HBO(if they ever get in to the independent streaming business) are really not price competitive.

Amazon Prime members can stream a lot for free at $79/yr . But if you want to watch the more current, popular, non-free stuff, it can run you $2 to $4 each.

HBO would undoubtedly be higher priced as an independent(not tied to cable subscribers) streamer. When did HBO EVER do anything that was inexpensive?

But the RedBox streaming venture, if it comes in cheaper as advertised, could be a big blow to Netflix subscriber numbers. Until Netflix sees how RedBox makes out, it would be better to hold off on raising prices.
--
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See 11 replies to this post
xenophon

join:2007-09-17

Netflix needs to add PPV as option

Netflix needs to figure out how to get recent movies and if PPV is the way to go, they should do it. Netflix app is available on more TVs than any other service. Most studios/distributors would probably work with them on PPV if volume is higher than other players. Netflix might even be able to charge a buck less per view with higher volume. Whatever they do, they need to figure out how to get new titles at least as an option to the trad service.

BF69
Premium
join:2004-07-28
Camden, TN

Re: Netflix needs to add PPV as option

said by xenophon:

Netflix needs to figure out how to get recent movies and if PPV is the way to go, they should do it.

I've been saying this for a long time. It would bring in extra revenue. if I want to watch some PPV movie I have to go through Amazon or Vudu. It'd be nice to just stay with Netflix.
rradina

join:2000-08-08
Chesterfield, MO

Spend More on Content?

Shouldn't NetFlix spend more on content? They don't provide the connection, the consumer pays for that. They don't provide the "cable box", the consumer provides a suitable computing device. They don't have to make "service calls", the consumer provides that by calling their connection provider if that isn't working or contacting their computing device manufacturer if it isn't working.

NetFlix expenses are in funding the necessary computing infrastructure to stream video streams (no small expense), access to an existing delivery infrastructure (not trivial but probably cheap enough that it still keeps Ed Whitacre up at night) and paying for the content their subscribers view.

Why would Wall Street believe that they should have rates more in line with the likes of cable companies and HBO even though the dynamics of what they provide are quite different?
rradina

join:2000-08-08
Chesterfield, MO

Re: Spend More on Content?

I just realized they aren't comparing it to cable companies. My bad. However, it does appear they are comparing it to content creators which still probably has different dynamics. At least these days most of the networks named are funding the creation of their own custom content rather than just reruns of movies/broadcast network programs.

BF69
Premium
join:2004-07-28
Camden, TN
said by rradina:

Shouldn't NetFlix spend more on content?

At 25 million customers at $8 a month that's a total of $2.4 bil in revenue per year. Even if 100% could be spent on content would that be enough? Just to get Starz back would cost them $500 million a year and that's Starz.
rradina

join:2000-08-08
Chesterfield, MO

Re: Spend More on Content?

I'm surprised they don't go to some kind of royalty model. They know what's being viewed and it seems better to just pay the content creators a small fee per unique title viewed over the course of a month, per subscriber. This is like whip cream on top of the gravy for the content creators.

IllIlIlllIll
EliteData
Premium
join:2003-07-06
Hampton Bays, NY
kudos:7

i will cancel Netflix if...

the current streaming only rate is raised.

See 7 replies to this post

NonCableUser

@mellon.com

Cable Overcharges

It is not that Netflex under charges, but that cable providers over change because of the goernment imposed monopoly/duopoly they have.
osravens

join:2011-01-26
Cumberland, MD

Re: Cable Overcharges

The cable providers are not overcharging because of that. The government is not imposing a monopoly/duopoly, the market is doing that to itself by choice. Multiple providers don't feel its profitable, it's largely an industry that is believed to be a natural monopoly.

But the reason cable costs so much is the programmers wanting more and more for their garbage. The cable providers are stuck between a rock and a hard place, they can't keep costs down and they can't keep customers without the content.

NonCABLE

@mellon.com

Re: Cable Overcharges

I don't know where you live, but here in the state of Taxsylvania the government has imposed restrictions. Each little ogvernment body has its hand out to grant exclusive access. It's not a true free market, if it were this wouldn't exist.
elray

join:2000-12-16
Santa Monica, CA
said by NonCableUser :

It is not that Netflex under charges, but that cable providers over change because of the goernment imposed monopoly/duopoly they have.

Cite, please?

The government does not "impose" a monopoly or duopoly.
Reality does. The wired last mile is capital-intense. Not many locations are dense enough to tempt an over-builder to take the risk to chase $30/month rents.

skeechan
Ai Otsukaholic
Premium
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AA169|170
kudos:2

2 edits

I think Netflix could get away with $9.99

So long as they're still in single digits I think people will eat it. The service is inelastic when it's below $10.

pnh102
Reptiles Are Cuddly And Pretty
Premium
join:2002-05-02
Mount Airy, MD

Re: I think Netflix could get away with $9.99

said by skeechan:

So long as they're still in single digits I think people will eat it. The service is inelastic when it's below $10.

Agreed. If it was $9.99 a month I'd stay with them. They go above that and I'll give Amazon a second look.
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morbo
Complete Your Transaction

join:2002-01-22
00000
Reviews:
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The fact is they DO need to raise prices

Netflix must raise prices in the long run to survive. The content for streaming is simply too expensive to last on the current model and price point. Amazon gets by with their streaming because it is subsidized by the cost of Prime and the added sales from uses for these customers.

I have no confidence in the CEO of Netflix after the nutty attempt to split the company into streaming and DVD - and rename one of them - while also raising rates so dramatically. If the management team is this dense as to approve all those decision, I'm not certain that the company is being led in the right direction by the right team.
elray

join:2000-12-16
Santa Monica, CA

Netflix needs to raise rates

Its inevitable.

How else can they buy the content people actually want to watch, and how will they pay for delivery guarantees?

While they don't really have to worry about "competition" from Redbox, Blockbuster, or Amazon - those libraries are even more pathetic, they're losing what little content they already had.
GroovyPhoenx

join:2006-05-22
Gloucester, ON

Netflix Price in Canada.

If Netflix actually offered teh same content in Canada that they did in the states I would gladly pay 15$ a month, Sadly I have SEEn the content in teh states vs Canadian content and frankly, at roughly 1/3 the choice? If they raise it again it's not worth it. I'm done paying to get ripped off.

I figure at 7.99 it's worth it, I can usually find 2-3 movies a month to watch on it which if I rented would be about 5$ each.

But if you granted Canadians the option to view the content? Then we'd be happy and they'd probably gain customers.

Cheese
Premium
join:2003-10-26
Naples, FL
kudos:1

Who does Wall Street think they are...

To tell a company how to run their business... wow...
TuxRaiderPen

join:2009-09-19

Re: Who does Wall Street think they are...

said by Cheese:
To tell a company how to run their business... wow...
Ummm... where you been... Gordon Gecko(s) have been in charge for a while now... and ruining business for profits for decades...

Prime example.. FiOS. Short sighted investers who don't get it, and just want PAID NOW NOW NOW NOW NOW.
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El Quintron
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said by Cheese:

To tell a company how to run their business... wow...

I lol'd.

Nonetheless Wall Street is serving its own interests here by pushing Netflix to be less competitive vs BDUs, and of course name me a stock jock that doesn't love higher ARPUs.
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Linklist
Premium
join:2002-03-03
Longport, NJ
kudos:5
said by Cheese:

To tell a company how to run their business... wow...

Representatives of the people who OWN the business.
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cork1958
Cork
Premium
join:2000-02-26
said by Cheese:

To tell a company how to run their business... wow...

I was thinking the same thing, although I know businesses listen to Wall Street, for some dumb apparent reason, but this is ridiculous!

Wall Street is what got us in the totally messed state we're in and have been for years now!!
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Cheese
Premium
join:2003-10-26
Naples, FL
kudos:1

Re: Who does Wall Street think they are...

That they are
ISurfTooMuch

join:2007-04-23
Tuscaloosa, AL

Investor logic

Just my opinion, but I think this is what's going on here.

First, think about who Netflix is competing against. Mainly, it's the cable companies, since Netflix is directly threatening PPV revenues and also contributing to some people's willingness to either cut the cord or downgrade channel packages. Netflix is also competing against the movie studios, since having easy access to movie rentals drives down movie purchases. Next are chains like Blockbuster, Hollywood Video, etc., who have been decimated by Netflix. And then there's Redbox, Amazon, etc.

Now look at this from an investor's point of view. These people have money that they want a return on, so they shop for the best rate of return they can get, just as you shop for the best interest rates at banks when looking to open an account. The investors want Netflix to do something to cause their stock price to increase, since they care more about stock appreciation than actual profits. So, if Netflix raises prices and does well, investors are happy. OTOH, if Netflix raises prices and does terribly, well, the investors will likely have dumped the stock on its way down, so they're out before the company actually dies. And what will they do with their cash after dumping Netflix's stock? They can use it to invest in one of Netflix's competitors, companies that will likely see their stock price increase if Netflix leaves the market. Again, investors win.

So these people are by no means stupid. They may seem stupid from the perspective of how this move would affect the health of Netflix, but it makes perfect sense when you realize that all they want out of Netflix is immediate cash. If Netflix prospers, they keep riding the gravy train. If Netflix dies, they'll move their money to the companies that benefit from its demise.

Linklist
Premium
join:2002-03-03
Longport, NJ
kudos:5

Re: Investor logic

said by ISurfTooMuch:

So these people are by no means stupid. They may seem stupid from the perspective of how this move would affect the health of Netflix, but it makes perfect sense when you realize that all they want out of Netflix is immediate cash. If Netflix prospers, they keep riding the gravy train. If Netflix dies, they'll move their money to the companies that benefit from its demise.

And the trick, as always, is to get out before the stock price starts quickly dropping. Investing pros(mutual funds, institutional investors, etc) get out quick. The small investors are almost always too slow to react.
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ISurfTooMuch

join:2007-04-23
Tuscaloosa, AL

Re: Investor logic

Yep. Which is why these big investors like automated trading. They can just tell the computer the point at which they want out, and it will take care of the rest. The problem with these things is that they can cause rapid price fluctuations. Sort of like having a completely automated run on a bank if the computer thinks things are going downhill.

IMHO, computers are great for many things, but they're terrible at managing potential crises. They can respond extremely quickly, but they can cause the pace of events to accelerate beyond people's ability to assess what's going on and intervene.

jgkolt
Premium
join:2004-02-21
Lakewood, OH

Should Raise Prices - and i am gone

Netflix should raise its prices to 20 or 30 a month and get some good content. On the flip side if they do raise the prices i will be cancelling my subscription.
zod5000

join:2003-10-21
Victoria, BC
Reviews:
·Shaw

This is the downside of being a publicly traded company.

You have a lot of pressure from shareholders to increase profits.

I can understand wanting to go public (you get to sell your shares and instantly get access to a tonne of funds) but you loose your autonomy and have shareholders (especially the big ones) breathing down your neck to make more money to make the shares worth more.

I suppose if I had my own company I'd only go public if I really needed the funds to make some capital investments or something.
CXM_Splicer
Looking at the bigger picture
Premium
join:2011-08-11
NYC
kudos:1
Reviews:
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Re: This is the downside of being a publicly traded company.

Well, that was suppose to be Wall St.'s purpose, to provide funding for business, but it has turned into a monster. The shift away from 'doing business' and instead focusing on pleasing Wall St. and the shareholders is a MAJOR problem with today's economy, IMO. There is simply no reason to maximize shareholder profits... if you buy a stock, you make money when the company does well. Don't like the way the company runs its business?? SELL THE STOCK!!! You have no right to demand anything unless you are a participating member of the company. Owning a piece of paper you got from your stock broker doesn't make you a participating member of the company.
decifal

join:2007-03-10
Bon Aqua, TN
kudos:1

wallkiss

Wall street needs to kiss my biscuit maker! I'm sick and tired of crap going up because some fat cats want yet even more gravy... Looks like if they get their wish this will be yet another service i'll trim out of the budget.. I'm only doing DVD rentals being broadband isn't a real option here....

crazediamond
Maybe you shouldn't be so proud?
Premium
join:2002-01-19
Atlanta, GA

wall street...

Weird, Wallstreet must also want me to cancel my netflix subscription.

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