PhotoNetflix has suffered some bumps in recent times, both from investors and from consumers. Its 2011 decision to split off its DVD rental business from streaming, and charge $8 a month for both, didn't go over well with its customers.

So it was something of a surprise on Wall Street when the company reported a profit in the fourth quarter of 2012 after previously warning it would lose money.

Netflix's net income for the three-month period totaled $7.9 million, equaling 13 cents a share. The consensus on the Street was the company would lose 12 cents a share, making for a 25 cent earnings swing.

What happened? The company has quietly been building its streaming business, the area where it now faces the greatest competition. It finished the fourth quarter with just over 27 million streaming customers, two million more than three months earlier.

Unhappy customers

Netflix, however, still has unhappy customers, like Kate, of Glorieta, N.M.

“Once upon a time, I was lipstick kissing the Netflix envelopes to let them know how much I loved them,” she wrote in a ConsumerAffairs post. “Now, they are just another corporate nightmare that invites anger and frustration because they care more about their bottom line (which will backfire eventually) than about their loyal and faithful customers. We are treated with indifference and neglect. Honestly, I have come to hate this company and am on the verge of terminating my account with them after many years of faithful membership.”

Netflix  Jan. 24, 2013, 6:38 p.m.
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Kate was so angry that she neglected to say what, exactly, Netflix did to earn her enmity. Greg, of Sugarland, Tex., went into more detail, saying he thinks the company's missteps means it is no longer the market leader it once was.

“I've been a member since 2002 and have been very satisfied for most of that time, even choosing to remain patient and loyal during the whole Qwikster debacle,” Greg wrote in his ConsumerAffairs post. “But in recent months three changes I've noticed are really making it hard for me to remain a customer: 1) fewer and fewer streaming options, despite them gearing the website to make it more difficult to add DVDs 2 ) more "long wait" delays for many DVDs and 3) longer turn-around times to receive DVDs by mail.”

Streaming, not DVDs, powers the growth

Note that two and a half of Greg's three complaints are about the DVD side of Netflix's business. But in the most recent quarter, it was the streaming side that powered the growth.

Netflix credits the higher subscriber numbers in the last quarter to consumers buying new electronic devices, such as tablets and smart TVs. Uncommented upon is the shift in Netflix's streaming options and how consumers may have responded.

Nearly a year ago Starz Entertainment, the major supplier of movies to Netflix's streaming service, ended its contract and refused to renew. Oddly enough, Starz said it declined to do business with Netflix because it didn't think it was charging consumers enough for access to its content.

It was seen as a major blow to the company's ability to attract new subscribers and keep old ones. But Netflix has appeared to take lemons and turn them into lemonade, by offering multiple seasons of hundreds of television series. In so doing, it may have altered the way consumers watching streaming video.

Changing habits

PhotoIn the past, a consumer might download a movie and that would be the evening's entertainment. But increasingly, consumers sit down and watch multiple episodes – sometimes an entire season – of a TV show in one sitting, staging their own “marathons.”

Netflix has given widespread exposure to programs that many people didn't watch when they were on network television or cable. Shows like Breaking Bad, Walking Dead, Weeds, Louie, and It's Always Sunny in Philadelphia have expanded their audiences on Netflix. When the latest season of Portlandia was added to Netflix, it became an event – almost like the release of a new movie.

Even if you happen to be a regular viewer of How I Met Your Mother, but only picked it up in season four, you can watch the entire series, from the beginning and in order, on Netflix.

Worth watching

Finally, critics are point out that some of the best writing is on television, not movies. Series made specifically for cable, such as The Sopranos, Mad Men and Walking Dead have won critical acclaim, prompting actors who, in the past only considered movie roles, to take another look at the small screen. Actor Kevin Bacon, for example, has just launched a new drama series on Fox.

Netflix may have lost access to the most popular movies but the result is that it now appears to have an ample supply of content that a lot of consumers seem to value as much, or more. Is this development a happy accident or something cleverly engineered? Either way, Netflix appears to understand what it has working for it.

In it's promotion, it now gives its new content top billing, saying “Watch TV shows and movies...” not movies and TV shows.

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