Shares rise as Netflix reverses plan to split in 2

The company backtracks on separating its DVD and streaming businesses. Unfortunately, it won't be so easy to undo the damage the company has done to itself.

By InvestorPlace Oct 10, 2011 9:25AM

Updated: 4:50 p.m. ET

 

By Jeff Reeves, InvestorPlace.com


Netflix (NFLX) critics have been very vocal since the company's Sept. 1 move that would have separated its streaming video from DVD rentals. And it has been one wild ride for NFLX in recent weeks.


First we learned that 1 million Netflix customers defected because of the changes. Then Netflix CEO Reed Hastings stumbled through an apology and the company tactlessly revealed users would have to suffer through two websites with two billing accounts if they wanted both streaming and DVD service. The backlash was big, and shares went from more than $300 in July to as low as $108 recently.


Post continues below video:

Monday morning, the latest twist in the storyline was that Netflix will now abandon its plans to separate its streaming and DVD businesses. The stock climbed sharply at the open, but by midmorning was slipping back. It closed at $111.62, down 4.8%.

 

As in a B-movie lab experiment that goes awry, wreaking havoc on small-town America, this Netflix debacle is not so easily resolved.


Yes, some people may think it's a victory for consumers. The company previously said its DVD-by-mail service would operate via a separate website, Qwikster.com, but now that plan looks to be dead in the water. Hastings released a statement that said, "Consumers value the simplicity Netflix has always offered and we respect that." Netflix shares were soaring as much as 10% in early trading.

Here's why it might not help:


Some subscribers are gone for good. Keep in mind that of the million customers lost, most came from the DVD side -- from a projected 3 million to 2.2 million. If Netflix thinks it can just promise to keep the DVD rentals in-house and win those customers back, it has another think coming. Many consumers complain that Netflix offers a poor library of new releases -- just look at the current Top 100 movies shipped, and you’ll find The Blind Side from 2009, Crash from 2005 and TheBucket List from 2007 in the top three spots. Not exactly recent hits. The fact is many mildly dissatisfied customers sometimes stick around out of laziness or complacency. Once they’re gone, however, they need more than the status quo to return.


DVD business publicly revealed as disposable. Many folks had speculated that the biggest reason Netflix was going down the Qwikster road was to prepare the company for an inevitable spin-off. Hastings admitted that his "greatest fear at Netflix has been that we wouldn't make the leap from success in DVDs to success in streaming" and that "DVD by mail may not last forever." After treating your customers so carelessly and making those harsh statements (however true they might be), how can the movie-watching public ever feel like you truly care about their business -- or, more importantly, that you will truly ever listen to future complaints?

Netflix's poor leadership exposed. When Netflix revealed a dual-pricing model to combat the rising cost of streaming, many folks thought it was no big deal. Unfortunately, the move failed to properly measure consumer dissatisfaction. Adding fuel to the fire was the tactless divulgence that Netflix was going to demand consumers suffer duplicate log-ins and billing for the separate services, and the resulting "apology" from its CEO that was more self-justification than anything else. Now we have the eventual back-tracking six weeks later. Who the heck is steering this ship? And more importantly, the next time Netflix has to make a crucial strategic move with its business -- and it will very soon with competitors like Amazon (AMZN) and Apple (AAPL)rapidly growing their streaming video businesses -- how can anyone trust NFLX leadership to do the right thing? And by the way, amid this mess we learned that Netflix will lose its Starz titles in January, accounting for 8% of its total streaming library. Not very encouraging to the streaming-focused growth plans of this company.


Sorry, Netflix, but this monster has already gone on a rampage, and it's not as simple as calling him back inside. It's going to take a an army of PR workers with torches and pitchforks to tackle this beast -- and many months of vigilance to ensure there isn't a sequel to this disaster and the damage is fully repaired.



Jeff Reevesis editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.




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18Comments
Oct 10, 2011 11:12AM
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Wow.  Netflix marketing team has no idea what they're doing, if they're doing anything.  You'd think they'd put out some surveys before making these desisions.  DAF.
Oct 10, 2011 12:01PM
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Netflix made a big business mistake. They could of done surveys right on their website, but I don't understand why the company didn't?

If they would of increased prices less than they did the damage and customer loss would have been less.

I was considering  Netflix for my entertainment needs, but if you want to double prices and not improve service I don't want to do business,

Oct 10, 2011 12:12PM
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i was netflix for over two years,then they shot themselfs in the foot,i talked to them about their hike before it went into effect ,they said they didnt care about their customers ,and their thouhgts,money hogs is all they are,
Oct 10, 2011 12:59PM
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If netfix loses any of its streaming I definitely will be canceling as there is not that many movies to choose from that are newer. Redbox will now get my rentals for DVD on newer movies I won't be signing back up for that.  Was bound to happen have a semi-good company and it ruins itself by getting super greedy. 

 

Oct 10, 2011 12:08PM
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I'm still quitting because of their inconsistent streaming service.  There are some shows where I don't mind if they disappear, but my 2-year-old is another story.  I'm not the one who needs Netflix for my random streaming entertainment - there's also Hulu and YouTube, which are FREE.  Sorry, Netflix, it was a nice 6 months, but I don't feel valued by you at all.  Buh-bye.
Oct 10, 2011 12:34PM
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well, that CEO makes several million a year anyway so WTH!  he's fine even if they can him
Oct 10, 2011 12:28PM
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Is it likely that NetFlix will reinstate the old program as it was, allowing streaming video and mailed DVDs at, or near the previous price?

I dropped the DVD mailings after receiving notice of the change, and about to drop the service altogether because I don't have the patience to wait for new movies and rent all of them on RedBox before they are available on NetFlix. Most of what I watch on NetFlix streaming video are Showtime. If they are losing that, I will definitely be canceling the rest of NetFlix, especially if they raise prices unreasonably.

Perhaps they might do surveys in the future to determine what customers consider "unreasonable".

Oct 10, 2011 1:24PM
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Netflix needs to get their do do together before they kill the goose that laid the golden egg.
Oct 10, 2011 12:09PM
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Well at least you can give them credit for admitting a big miscue and trying to undo it. Many companies would never admit they were wrong and would prefer to go under rather than say they made a mistake. I am a netflix member and I was mad at them and looking to make a change. If now instead of changing the way we can we get our movies they raise their price instead I will still drop them.
Oct 10, 2011 3:02PM
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It's time for new management at NetFlix. Oust the CEO and stop paying that man millions to screw up the company and anger their customers! Start thinking about what is in the best interests of the customers, not your own bank accounts.
Oct 10, 2011 1:20PM
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We also dropped the DVD service when they doubled the price to keep it, and we have not taken our business elsewhere since we rarely watched the DVDs anyway.  The only reason we keep Netflix streaming at all is because our kids like watching classic cartoons from the 80's and 90's (like Inspector Gadget and Care Bears). 
Oct 10, 2011 5:22PM
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Netflix with all their fiascos has lost me for good.....
Oct 10, 2011 12:27PM
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I have been a happy customer for 5+years. I got this for my 89 yoa Mom and she has enjoyed the DVDs. Streaming appeared one day and is good for my grandkids and a rainy day. Not much to chose from if you are a grownup. I have had an $8.00 raise in the cost of this service. You are right there is not much new to pick from and the red box is more up to date. I guess their CEO will probably get a few million bonus for this fiasco. Will give it a chance to repair the damage but will leave if not happy with the fixes.
Oct 10, 2011 3:26PM
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People amaze me.  A bunch of whiners.  Netflix should start thinking about their customers instead of money?  Oh yeah, every other company in America does that.  It's ALWAYS about the money, and the reason companies need to keep their customers happy is so they make money!

Netfix pretty much cornered the market until recently.  Can you say competition?  Now Netflix is needing to change things to compete.  I don't see reversing the decision to split the DVD/streaming as wishy-washy. 

Netflix can't win.  What the country lacks anymore is patience.  Netflix, or any company, does not cater to the needs of one individual.  So get angry, take your business elsewhere (because Amazon and Redbox care about YOU and not the money), and cut off your nose to spite your face. 

I decided from the beginning to hang on and wait until the fat lady sings.  So far I am glad I did, and I think when it is all said and done, Netflix will still be the best bang for the buck.

Oct 10, 2011 5:32PM
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The CEO Reed Hastings is beyond clueless. Message to Netflix Board...dump him before it's too late (if it isn't already).
Oct 10, 2011 3:59PM
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Reed Hastings, what an incompetent, greedy fool smearing it all over his face and asking for seconds. Throw him to the lions.
Oct 10, 2011 7:48PM
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My wife and I were so tired of the Netflix BS.  Their site was always having trouble, and they would make changes to our list for us.  We dropped them as soon as we could.  Now we're using Blockbusters mail service, which is cheaper and the site works better.  Plus I can get newer movies and do trade-in's at the store.  Down with Netflix and their piss poor management.
Oct 10, 2011 7:18PM
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I was so disgusted with Netflix decision that the same day their automatic payment withdrew from my account I canceled the very same day.  Didn't even wanted to be bothered claiming the remaining 30 days of unused service.  Hopefully they get the message!!

Where is competition when you need it!

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