Give Netflix's CEO an A for effort

Critics of Reed Hastings are missing the point: You can't innovate without failure.

By TheStreet Staff Oct 28, 2011 11:23AM

the streetBy Richard Levick, TheStreet

 

By now, it's old news that Netflix (NFLX) has aborted its plan to break up its service into separate DVD-by-mail and online streaming businesses. And by now we all know why: Customers were in revolt over the changes to a brand that they loved and the price increases that were necessary to make those changes possible.

 

Along with the recent announcements, Netflix revealed the damage done in real numbers. The company ended the third quarter with 800,000 fewer subscribers, and its stock price plunged by 37%. Profit tells a more reassuring story, as the company posted a net income of $62.5 million, up almost $25 million from the previous year, with total revenue up 49% to $822 million.

 

In any event, for Netflix the negative consequences of this episode are likely short term. With Apple (AAPL) and Amazon (AMZN) among the barbarians at the gate, the moves CEO Reed Hastings made to emphasize streaming over old-fashioned DVD rentals, and to raise prices for its services, were the right business moves, however sloppy the communication.

 

A simple calculation confirms that point, notwithstanding all that has been written about the 800,000 lost subscribers. The company potentially lost $12.8 million per month when those subscribers left the fold, which Netflix attributes largely to the price increase. But the company stands to gain more than 10 times that much: $142.8 million per month on its remaining 23.8 million domestic subscribers simply in the delta between the old and new price points (assuming they all stay on at the $16 rate).

 

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It's the companies that get the wrong message from the current controversy that stand the greater risk of long-term and potentially catastrophic consequences. The worst conclusion when an industry leader like Hastings seems to stumble (and "seems" is the operative word) is that he was too bold by half; that risk needs to be minimized; that you don't fix what ain't broken; and that, in general, innovative, future-oriented leadership is somehow possible absent the kind of calculated risk-taking that distinguishes pioneers like Hastings.

 

In business, in sports, in politics, it's a truism that every idea that fails is not by definition a bad idea. Innovation is the lifeblood of business and the key to future survival. As companies must contend with seismic changes in technology and consumer behavior, the calculus of change vs. stasis, of risk and benefit, is decisive. As one commentator has noted, "Today's business conditions give new meaning to the words of the Greek philosopher Heraclitus: 'All is flux, nothing stays still -- there is nothing permanent but change.' "

 

Buck that inexorable trend, and you run what's really the greatest risk, of becoming the next Blockbuster or Borders. Steve Jobs is the legend he became because he understood that, "Sometimes when you innovate, you make mistakes. It is best to admit them quickly, and get on with improving other innovations."

 

Reed Hastings knows it too. It's possible, just possible, that he has more in common with Steve Jobs than his current detractors might recognize. Up until September, he could do no wrong. Fortune's 2010 business person of the year, he was hailed as a bold visionary for capitalizing on the next big idea that revolutionized an industry. Blockbuster, less nimble and quick, ignored the changing business dynamic and authored its own demise.

 

By emphasizing streaming over traditional DVD services, Reed Hastings was doing what he has always done best -- ensuring that his company does not fall prey to technological obsolescence. If Netflix made business mistakes -- a debatable point -- its instinct toward innovation wasn't one of them. It would be a huge mistake for companies to use the Netflix story as a reason to play it safe.

 

Hastings has been quoted as saying he still believes that the company's future lies in streaming, and most analysts and investors would presumably agree. If the 800,000 customers who cancelled their subscriptions are too big a hit for Netflix to take, then Hastings may indeed be the pioneer who gets the proverbial arrow with no choice but to now engage in a tactical retreat.

 

But I'd hate to see what our economy will look like in the next decade or two if companies in or out of the technological sector base their growth strategies on tactical retreats.


This commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.


19Comments
Oct 28, 2011 7:01PM
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This is ridiculous. Innovation does not mean making ignorant decisions. If a sales manger lost this many subscribers, then they would have been fired. A CEO is paid to not to make marketing 101 mistakes. Stop hugging this CEO and the Board must fire him. 
Oct 28, 2011 4:48PM
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I, for one, cancelled because of the way it was handled not because of the price increase or the split.  Heck, I cancelled before the split was even announced.

 

If I am a customer I should not have to read about the coming price hike in an article on MSNBC.com.  Also, there was a little blurb on the payment part of their website, a part I never visited because my account was set for automatic payments.

 

Additionally, when I called customer service to find out if the articles were true the attitude I got was, "I don't know anything and who cares...."

 

So, good riddance.

Oct 28, 2011 6:16PM
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I left Netflix the last time Reed was disrespectful of his customer base.  The company would do well to replace him.  His arrogance is costing them a lot of business.  He gets an "F" for achievement.
Oct 28, 2011 7:46PM
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You don't give an A to people who destroy the company they built twice as  fast as it took to create.
Oct 28, 2011 6:56PM
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at least netflix sees what it has done to it customers. All in all netflix is still the best service we can get, and yes they deserve an a for effort, unlike the cable companies and dish and direct who could care less what their customers think and like. Talk about money hungary, direct and dish are just like the US Government and state government, give us all your money and we will give you nothing.

Oct 28, 2011 6:12PM
Oct 28, 2011 8:16PM
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Netflix's model of unlimited streaming/DVDs is still superior to any pay-as-you-go service like Redbox.  The company is worth far more than it's current stock price indicates.

 

What the industry should learn from this is the current climate won't support an increased price structure.  Showtime, Starz, and the rest of the content providers should be able to see they can't squeeze more out of Netflix or any service like it because the customers won't pay for it.  No one is going to buy individual services from each studio so Netflix is the best outlet for their product.  They need to work with online portals like Netflix (and Amazon and Hulu), not inflate the cost of their shows to the point Netflix can't offer them.

Oct 28, 2011 5:28PM
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The attempted split of the company was stupid.   I know why he did it.   In time the DVD business will have to be eliminated.  But that is years from now.

 

He and those in charge of the company made to big and very bad decisions that turned into PR nightmares.

 

1. The framed a price increase as a way of lowering customer prices.   He could have raised prices and split the service and been honest about it and people wouldn't have been as upset.   But instead of making the studios the problem he made his company the problem.

 

2.  He attempted to split the services onto seperate websites.   Making the end user experience harder.

 

Basically by number one he woke up a lot of customers like me who were paying him monthly and not even watching movies.   The people who canceled at this stage would have been his most profitable.

 

One number two he pissed off the hardcore movies buffs.  The ones who likely had the larger plans.   And once again likely some of his most profitable.

 

What he is left with his the less profitable middle.  The ones who subscribe to the lowest services and make full use of them.   They didn't leave because they still got great value.

 

Honestly Netflix could have handled number one much better.   Splitting the DVDs from the streaming was needed.   He could point out for people who used both it was a price increase.   But the studios were charging more and had to keep the business viable to continue to provide the service.   And this way people who only did streaming or only did DVDs could save money by getting rid of the cost of the other.   The rest would still get great service but pay more because of the costs to get the content they want.   Basically we know you won't like it but we have to do this to make the service better.   People would listen to that.

 

On point two it is far too early to be splitting the company.   He was trying to make a move way too early while too many customers did both.   In time streaming would have won out as he got more content and at that point the move would have effected far less.   Specially since he split the services.  A year or two down the road he could see what percentages were doing both, dvd only, or streaming only.   Once the both group was small enough the move would make sense.   And in time the dvd business would be left out to dry and free Netflix from it's losses that were bound to come.

 

But instead he messed up the price increase/service split and followed it up with the company split which was a PR nightmare.  Clearly this is a company full of yes men afriad to tell senior management that their ideas are dumb, executed wrong, or timed wrong.

 

This left clear signs to investors that the captains didn't klnow what they were doing and no one was there to stop them from shooting themselves in the foot.

 

Any investor who kept faith in the company after this were foolish.   no company that bleeds customers this quickly is a good buy.

 

And the studios should be worried as this likely pushed a good percentage of those lost customers back into the arms of free movies via piracy.

Oct 28, 2011 5:56PM
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Wilted roseAfter being a long-time customer of Netflix, I was very close to quiting their service.  I like the convenience of having DVDs over streaming.  I'm not very happy about their price hike and will give it a little more time.  I live a couple of blocks from dollar DVD rentals and can use them just as easy as Netflix.  Let see if the CEO honors us that remained or if he wants to continue taking advantage of us.  I believe that the next attempt to alienate the remaining customers will lead to the demise of Netflix.

Oct 28, 2011 9:12PM
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Give Reed Hastings an A for effort? An index finger is more appropriate, no?
Oct 29, 2011 7:58AM
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To sum up the article "Yea we failed."  Typical CEO trying to squeeze every penny out of their customers.  They lost 800,000 customers.  Soon to be 800,001.
Oct 28, 2011 7:01PM
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I am a Netflix customer who was irate when I heard about the price increase because at the time the choice of programs in their streaming service was absolutely abysmal. There was nothing on there I had any interest in watching. I planned to cancel my subscription before my cost increased. But then they added a lot of new shows, and it didn't feel like a ripoff anymore. Since the price increase was announced they have added a TON of new shows to watch - including many of my favorites that were not available before. I feel that I am getting a reasonable value now and it feels like a great alternative (alongside other services - not by itself) to cable. If they had not added all that additional programming I definitely would have cancelled.
Oct 29, 2011 9:39AM
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I seem to remember this CEO doing an about face over the poor decision making in this matter and basically making an apology online for this poor business move.  For that I give him an 'A'.  However, I give their board of directors who have the job of firing him so that they can save face an 'F'.  Ultimatey it is these boards of directors of these failing companies that are screwing up. Consumers should be going after them.  And some of these board members sit on multiple boards and make multiple poor decisions.  The CEO is a figurehead who takes the brunt of the reactions from the consumer over poor business decisions but what is he/she being told to do by these boards of directors and their decisions that are brought about by vote?  These poor business decisions go right to the top and the top are the boards of directors of these companies that are failing their customer base.  Boards of directors can set up a CEO or such person to fail or succeed and don't think that they don't do these things.  It's easy to fault someone like the CEO, CFO, etc. for failure rather than be able to point a finger at the actions of a board of directors who are manipulating the publically perceived performance of that CEO, CFO, etc.  And these boards are destroying the 'talent' future business career.  Why do you think these boards of directors give these CEO, CFO, etc. millions in severance pay?  It's hush money paid by the board of directors to the 'talent' so that the board of directors' poor decision making and dirty deeds won't be found out. And all the while these persons who sit on these boards and are the ultimate authority over what happens within these failing companies get to sit of their collective fat butt out of harms' way apparently without fault and make good money for their ineptitude.

Oct 29, 2011 3:56AM
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I wouldn't piss on Reed Hastings if he were on fire.The man is another obama,only more in your face.He's laughing while screwing the customers and stockholders,they should have his head on a pike.The man is another buffet wanna-be.
Oct 30, 2011 8:39PM
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I give Netflix CEO an F for fired. What he's doing now is what he should have done in the first place.
Oct 28, 2011 5:09PM
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I would agree and disagree with your presumption.

 

I one hand, hubris leads to obsolescence and ruin. Being replaced by a new, innovative product or service is unavoidable, which is why successful leaders always look for ways to re-invent themselves and their companies to remain on top. Imagine if Polaroid remained content with the instamatic camera.

 

I don't fault Hastings for recognizing and trying to capitalize on the inevitable transformation from hard dvd to streaming video. In fact I commend him for realizing the need to shift.

 

Where I disagree is the execution of the strategy. This is where subpar leaders fail.

 

Instead of implementing "shock and awe" to his existing subscription base, he could have designed a premium "streaming video" only service. He could give his current subscriber base a "short term" private invitation to convert to the new service without a price increase... (maybe 6 months) at which time their subscription would adjust to the new rate.

 

In regards to profit, it may look the same in the short term, minus the negative PR taste in the current subscribers mouth.

Oct 29, 2011 12:17PM
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Hope CEO don't get a big bonus this time for his big mistake 

netflix should work more on getting their 5.1 sound for the streamming I stopped doing streamming because of the poor sound quarity

Oct 28, 2011 5:49PM
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Our action is to wait it out.  The steaming content is virtually useless!  Maybe they will improve it soon.
Oct 28, 2011 6:16PM
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Streaming was all I did before I canceled. You can't go wrong with unlimited Doctor Who!. Anyway, I may sign backup someday.  But with Netflix built into most devices, they should have every movie available online. I would even pay more than the price increase if they made that happen.

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