Qwikster calamity socks Netflix stock

After trading above $300 in July, shares have tanked to near $75 on continued subscriber woes.

By InvestorPlace Oct 25, 2011 8:00AM

By Jeff Reeves, InvestorPlace.com


After trading at more than $300 in July, Netflix (NFLX)was hovering around $77 a share Tuesday. It's all because of an earnings report after the bell Monday that showed customers left in droves and revenue missed forecasts by a mile.


The culprit is obvious: the ill-advised Qwikster scheme that aimed to split Netflix's streaming services and DVD delivery into two operations instead of a one-stop website. Qwikster was killed before it became a reality, but the damage remains to the once-loyal customer base of Netflix.


Post continues below.

Of course, the story here isn't that Qwikster took a toll on Netflix. That was painfully obvious months ago. The real story here is the continued descent of Netflix's stock and whether the company will ever truly be able to recover.

Hopefully, shareholders were aware they hadn't seen the worst of this debacle. Since September, we've known the company might be dealing with a defection of up to 1 million customers because of price increases and a general mishandling of the entire ordeal. And any Netflix investor or customer surely has strolled through online forums eviscerating the company and chief executive Reed Hastings for the move -- proving anger has not abated.


The true depth of this crisis became clear after the closing bell Monday. Netflix ended September with 23.8 million U.S. subscribers, down about 800,000 from June -- significantly worse than expected. Going forward, things look ugly, too. Most of the company's U.S. subscribers are streaming customers, with 21.45 million as of the end of Q3. But Netflix expects fourth-quarter streaming subscriptions to fall to between 20 million and 21.5 million.


Flat at best? Not very impressive.


Worst of all, a planned expansion into the United Kingdom will be costly, and the lack of expected revenue could mean a quarterly loss in the first quarter of 2012.

So there you have it -- a deep loss in current subscribers, the prediction of future losses and the chance of a money-losing start to 2012. You have to wonder whether Netflix will ever get beyond the Qwikster debacle and the hubris of Hastings.


True, Netflix saw a big jump in profits, from $38 million in the third quarter of 2010 to $62.5 million this year. Revenue surged to nearly $822 million, $9 million above forecasts. It's not like Netflix is going bankrupt. And even if NFLX gets to $80, that will still be a gain of more than 50% in two years -- double the Dow Jones returns in the same period.


But the writing is on the wall. Netflix said loud and clear that it didn't care about its customers, and the company has a lot of work to do if it wants their trust back. This comes at the worst possible time, as the competition is heating up for NFLX. Hulu is considering an IPO, and Amazon (AMZN) and Facebook are going heavy with streaming video.


Netflix has been on a red-hot run for a few years now, and it's difficult for investors to watch a darling stock like this crash to earth. However, those wishing and hoping for a second act at Netflix had better have realistic expectations.


The company has left the door open for future subscriber losses and a quarterly loss in 2012. Just imagine if management has miscalculated and things turn out much worse.

Given the track record of Hastings and others at Netflix, that wouldn't exactly be a surprise.


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.


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425Comments
Oct 25, 2011 3:24PM
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Perhaps they would have better luck if they tried a little humility.  First, the extraordinary jump in prices, followed by their explicitly greedy motives ("we expect that we will lose many customers, but we will more than make up for it with our new pricing scheme"), followed by the worst excuse for an apology I've ever seen (and should be construed more as a "justification" than an "apology") which led to the Quixter split, followed by the thinly veiled jab at their customers' intelligence ("we didn't realize how much our customers valued the simplicity of one website") which led to the nixing of the Quixter plans - frankly, I'm surprised they've been able to stay in business at all!  I'm all about saving money, but I wouldn't give them my business now, no matter how good the deal seemed.  Netflix, you shot yourselves in the foot over and over and over again.
Oct 25, 2011 2:33PM
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I dumped netflix after being a very happy and loyal customer for a long time.  But take away half the service effectivly duobleing the price?  Are you guys nuts?  Have you fired the genius who came up with this yet?  Did he work at Coke before netflix?  What were you thinking? 
Oct 25, 2011 3:36PM
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I can understand the anger, but it seems to me that Netflix is being singled out here.

It's not one company or another. It's the corporate mentality that has infested them all. By that I mean, the new corporate model of screwing employees, customers, and shareholders as these greedy, short-sighted CEO's ruin one company after another to make a quarterly bonus.

I've seen to many good business's, that stood for something, turn to excrement as maximizing profits is the only imperative for these corporate clowns.

Oct 25, 2011 10:26AM
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HAHA.. thats what they get for trying to stick it to there customers like they did with the split of the dvd/streaming services, and then doubled the price with only 1 months notice.. I hope they fire the CEO, what a dumb***. 
Oct 25, 2011 2:42PM
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netflix's streaming content is nothing but old tired stuff.  Thats why you have to have the dvd portion.  They were making large profits as it was.  Just not large enough i guess,

 

Oct 25, 2011 3:36PM
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A crack whore as a CEO would not make this big of a screw up. The Netflix Board is already taking too long to fire this  incompetent CEO. Does the stock have to drop 75% before they act?

Oct 25, 2011 5:17PM
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I didn't leave because of the price increase - a few bucks don't matter much. I left because when they first announced the price changes, they admitted that they would lose customers, but they didn't care. They said they'd make it all up with new customers. And if they don't care about me, I don't care to do business with them.
Oct 25, 2011 3:33PM
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Couldn't have happened to a better company and an even better CEO! They clearly showed they didn't care about the customer and they got burned. Shame on them! I know I'm canceling my subscription! I hope the CEO loses his job and the company falls flat on their rear!
Oct 25, 2011 4:41PM
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Thats what happens when these greedy giants try to squeeze more money out of hard working people.You suck netflix.
Oct 25, 2011 5:01PM
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You know what, they got what they deserved for being so greedy.  More people need to band together against other price gouging companies like these, but some people just do not realize the power they have when they band together. All they care about is they have to have it now and they dont care what it costs, this is how these companies have gotten out of control. Band together and give back the POWER TO THE PEOPLE.
Oct 25, 2011 2:40PM
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I'm very glad to see NetFlix taking a beating. They are, in large part, responsible for the failures of places like Blockbuster and Hollywood Video.
I prefer to go to a actual store and renting or even purchasing a used video to watch. I miss those stores. Netflix came along and got people into the rent by mail and then the streaming. Once they got you hooked then they decide they want to be greedy and take more money. I am glad that the people have said no more and dumped them.
I hope they fail completely and we can somehow get back the old fashion video stores.


Oct 25, 2011 5:07PM
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Netflix put most of the video stores out of business and once they accomplished that, they raised their prices.  Crooks. They're getting exactly what they deserve.
Oct 25, 2011 7:35PM
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You simply don't screw your customers in a bad economy, when your revenue depends on consumers' disposable income.

Idiots.

Oct 25, 2011 4:54PM
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Netflix got greedy and the American people said NO MORE, STICK IT!
Oct 25, 2011 11:22PM
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"Analysts" STILL getting it wrong: when do I have the time or energy to get "mad" at netflix? Here's a real customer perspective, in terms even an anaylyst can understand:  ... Say I have a favorite pizza joint - lets call it Pizzalix. It's close and convenient so I pick up pizza there every week from the owner, Red

 

One day I go in to find Red raised the price of pizza by 30%, he says cheese is expensive.  So I buy a Small for half the price of Large I usually get. No big deal - actually it meant I just spent a little less and had fewer calories - cool.

 

Next week I go in again for a small pizza.  Red says: "We've changed the way we're selling Pizza.  We split the business in two: now we just sell the main part of the pizza; the crust with marinara sauce and if you want cheese just walk one block south to our new Cheese business - Slowsters - and they'll give you cheese. It's not far to walk at all."

 

I say to Red: "The pizza will be cold by the time I get to Slowsters, and the joy of pizza for me is when the cheese is melted right ONTO the Pizza, not just added on cold 5 minutes later"

 

He says: "5 minutes isn't long to wait for cheese, and the analysts think it's a great idea - it's part of our long term survival strategy, because cheese is so expensive, so if we send people who want cheese elsewhere, we keep the most profitable, cheap to make, part of the pizza business. Dough and marinara is cheaper to produce without cheese, so we will do better in the long run, and you can keep coming here forever".

 

When I look confused, Red tells me to just leave a comment on his blog, and have a nice day. 

 

So like all Red's other customers I leave a comment on his blog, but the analysts in the local newspaper write an article the next day - they think Red's really onto something - cheese IS expensive, so by dropping the cheese part of his business Red is an absolute business GENIUS!

 

I'm not mad a Red, I just like Pizza with cheese, so I go to the other pizza joint that's just a little bit farther away, but just about as good - and it comes with cheese.   I'm not "mad" at Pizzalix, in fact I feel a bit sorry for Red because I CAN TELL HIS BUSINESS IS GOING TO TANK! and I tried to tell him on his blog right after he told me about the cheese thing.  But that's as much effort as I'll make to save him from himself...  at the end of the day it's just pizza, and I can get it anywhere.

 

That's why netflix should talk to customers not analysts. We're not "mad" - we just know what we will buy and what we won't.

 

Sorry analysts - it's not psychology - It's plain old MARKET FORCES!!!

Oct 25, 2011 4:28PM
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Arrogance on par with Apple. From a customer perspective - I was an early adopter of their service, and I guess my habit of renting only new movies triggered some threshold on my account. I went from viewing 2 - 3 new titles a week to on a waiting list for ALL NEW TITLES!! and viewing 2 to 3 a month. Thus I wrote to management/customer service concerning this and got (insert sound of crickets here) for a reply. I made good on my promise and cancelled my account and it appears my warning that is they stop offering a valid service, the customers will stop subscribing. It seems I was right. I have been a Blockbuster subscriber for the past year with no issues!! Yes, they are still in the DVD delivery business and it is transparent when compared to that offered by Netflix.

 

At the end of the day Netflix is selling a service and they need to provide service if they expect to generate revenue. Stockholders take note - Apple is one of the few companies to prosper in spite of their clear arrogance!

Oct 25, 2011 4:13PM
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Qwikster had nothing to do with it, if they split it into to 2 different things but kept the pricing the same or maybe raise it 10% then I would have easily kept both. Who cares if you have to sign into 2 different websites. The extreme price hike is the only reason people are cancelling netflix. 
Oct 25, 2011 8:34PM
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Wake up, America!  It has been proven time and time again that the consumer has the upper hand when it comes to how we are treated by big businesses.  All we have to do is STOP BUYING and do without!  We complain and complain but continue to buy. . . .and continue to get screwed.  If we are going to keep paying their ridicules prices and outrageous fees, we deserve what we get.  Stand up for what is right, America!  ENOUGH IS ENOUGH!

Oct 25, 2011 7:00PM
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People need to stop trying to blame the exodus of subscribers on the Quickster fiasco. Most people including myself who left Netflix, left because of their "take this huge increase and love it" mentality. They could have cared less if people were mad about the price increase, until their stock took a dive.

People are just tired of obnoxious companies shafting to customers.
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