I hope they can keep their streaming service alive, otherwise I'll have to give my money to someone else (and nobody else has a comparable service yet). I'll be very upset if my Netflix streaming goes away for any reason
Netflix is suffering after a series of public relations debacles -- and now, shares are tanking on massive subscriber losses. The problem? Its chief isn't hearing what customers are saying.
By Dan Mitchell, contributor
FORTUNE -- There's no denying that Netflix and its chief, Reed Hastings, have made serious missteps. In trying to move the company away from DVD rentals as it expands its streaming-video business and in raising prices for some customers, Netflix has suffered major setbacks one after the other. That doesn't mean, though, that the overall strategy isn't sound -- only that Hastings has bungled the presentation and wildly misinterpreted the source of his customers' anger. Most astonishingly, he is still refusing to do anything to do anything for his customers to make them feel better about the company.
And he's been punished for it -- severely -- by both customers and investors. The future of movie rentals is clearly in streaming, and Netflix (NFLX) eventually will drop DVDs one way or another. In a since-dropped plan to split the company in two, with Netflix offering streaming and a new company, to have been called Qwikster, offering DVDs by mail, the company moved too abruptly. It alienated a lot of customers. And, it was all the worse having come just after the company changed its pricing, meaning that people who wanted both streamed movies and DVDs pay more. (That pricing is staying in place.)
Many of those customers had a righteous beef -- those who wanted access to both DVDs and streams (because many movies aren't available via streaming) would have been faced with an unnecessarily cumbersome process, having to order from two different Web sites with two separate billing systems. Others, though, had simply gotten used to having access to an extraordinary catalogue of films for an extraordinarily low price. When those prices went up, they reacted. On Monday during its third-quarter earnings conference call, the company revealed that over the past three months, it lost about 805,000 customers.
And yet, the bottom-line message from Netflix seemed to be: We're moving to streaming, even though there are a lot of movies not yet available there, and you're moving with us or else you're paying a lot more. Oh, and you're not getting more for your money; in fact, and many of you are getting less. Customers who want to continue having access to both DVDs and streamed movies are paying 60% more than they had been. They may still be better off than they would be in a world without Netflix, but they are worse off than they were before the price hike.
Some of Netflix's problems could have been averted if the company had simply offered something for the extra money it was demanding. Perhaps even the split into two companies would have gone over. But Hastings still doesn't seem to quite understand the nature of his customers' rage. On Monday, he told analysts there would be no special attempt to bring back some of the customers Netflix has lost. "The focus is on bringing back our reputation and brand strength, but it won't happen through grand gestures," he said.
Hastings might understandably be nervous about grand gestures, since he hasn't had much luck with them recently. But things are different when a grand gesture is actually a benefit to customers, as opposed to being simply a way to extract more money from them. And now that Netflix is entering a period of greatly increased costs and increased competition from the likes of Amazon (AMZN), the company can't afford to rely on its brand alone.
In announcing earnings on Monday, the company forecast that profits will fall to between $19 million and $37 million in the coming fourth quarter. That's quite a range, but at either end if it, it would be considerably down from the $62.5 million in profits Netflix reported for the third quarter, which were up 63% from the year-ago period. Investors are punishing the company severely, with shares trading more than a third lower in late-morning trading on Tuesday.
Netflix has its eye on the long-term future -- a future of movies streamed over the Internet -- and a future that lies largely overseas. That's a good thing. "But the plans to sacrifice short-term profits concerned some people on Wall Street," the Wall Street Journal reported on Monday.
If Hastings had handled its recent moves more deftly, it might not have lost so many subscribers. As it is, Hastings has put himself in the position where any criticism of him and his company is considered valid. It will take more than brand management to turn that around; he's going to have understand what's behind customer rage.
It's interesting... there's an add at the bottom of my screen for NetFlix and it's only pushing the streaming service.
Netflix’ management self-torpedoed its investment growth-story with a new negative-growth-outlook. Expect Netflix investors’ woes to continue, because in announcing earnings, Netflix’ management made their third big strategic mistake in just three months, in guiding investors to an unprofitable outlook for 2012 and establishing a new “Netflix negative growth story.”
This assertion warrants a story recap. Netflix’ first admitted big strategic mistake: being clueless about Netflix’ real customer value proposition. In July, Netflix shocked their industry-low-cost-leader video customer base with an abrupt out-of-nowhere 60% price increase.
Netflix’ second admitted big strategic mistake: being clueless about running a competitive business. In August, Netflix required Netflix customers to do the grunt work of separating Netflix into streaming and DVD businesses by requiring customers to sign-up and maintain two separate Netflix accounts — not one. In September, Netflix mercifully recanted that inexplicably burdensome customer directive.
Netflix’ third, not-yet-admitted, big strategic mistake: being clueless about their investor base and what their investors have been led by Netflix to expect. Yesterday, Netflix guided that they are abandoning overall profitability in 2012 for investing in overseas streaming growth for Ireland and the UK.
Is anyone else wondering how a company that was profitable before instituting a 60% price increase that caused a less than a 4% reduction of its customer base, could somehow become unprofitable? The only explanation is that Netflix is an out-of-control cost-growth story (with exploding discretionary content and cap-ex costs/plans), not a profit-growth story, that most all Netflix investors had been led to expect from Netflix.
Netflix apparently has no clue why its stock had such a run or what its current investors still obviously expect from Netflix. Investors’ conventional wisdom obviously had assumed Netflix’ rising steady industry-leading subscriber growth momentum meant Netflix revenue growth generally would outpace cost growth because of economies of scale; this also meant Netflix could be considered a hot earnings growth story. However, with Netflix’ latest investment guidance for negative earnings growth in 2012 and possibly longer, Netflix has shocked its investors again, this time with a radical change in its investment profile – from a growth company, to a planned unprofitable value play trying to walk a tightrope from a DVD mail business to an Internet streaming business.
In sum, Netflix strike one in July was shocking customers with a 60% price increase and investors with an abrupt end to subscriber growth momentum. Netflix strike two in August was shocking customers again with the hassle of having to maintain two Netflix accounts. Netflix strike three in October, was shocking investors again, by abruptly signaling Netflix was no longer the growth company it long represented itself to be, with increasing earnings growth prospects going forward, or a company that cared about maintaining profitability going forward.
The open question for Netflix’ board is: with three strikes, is anyone called out?
Price hikes may be necessary to deal with drastically increased costs. Netflix has to find a way to justify the money it spends on content licensing deals if it wants to still be able to offer its customers the movies and TV shows they want.
Netflix also has ambitious growth plans internationally, and said earlier this week that it will lose money for the next few quarters as a result.
Netflix needs to get in touch with customers' rage
It may also be the case that, for the long-term, it's better (i.e. more profitable) to have fewer subscribers paying more a month than continually adding customers that only sign up for the cheapest plans.
But I can't help think that the decision to raise prices so drastically -- $15.98 a month to have DVDs and streaming is a 60% jump -- is eerily similar to the moves AOL made in the early part of the 2000s. (Those Naughty Aughties!)
Of course, prices hikes weren't the only thing that hurt AOL. It languished for years as a subsidiary of Time Warner (TWX, Fortune 500). The 2001 AOL-Time Warner deal is still viewed as one of the worst corporate mergers ever. Time Warner, the parent company of CNNMoney, finally (and mercifully) spun-off AOL in 2009.
But just as AOL faced a major identity crisis while trying to morph from a stodgy 20th century Internet access company to a cool content provider -- one that lasts to this day -- Netflix also can't figure out what it wants to be when it grows up.
How else to explain Netflix's ill-fated decision to rebrand its DVD business Qwikster in September, only to hastily abandon the plan a few weeks later?
Now don't get me wrong. Netflix has a lot going for it, and the worst may be over for the stock in the short-term. Shares now trade at just 14 times 2012 earnings estimates. (Of course, those estimates may be still too high.)
Netflix: Reed Hastings
Netflix, once a red-hot stock, has lost nearly 60% of its market value since the beginning of 2011. The company's dramatic decline is due in large part to the mistakes made by CEO Reed Hastings who followed a "textbook strategy" on how to handle a core business in a downtrend, says Finkelstein.
In September, Hastings announced Netflix would split its struggling DVD mail-delivery business from its booming online streaming business and raise prices at the same time. (See: With All Respect To Reed Hastings, The Netflix-Qwikster Split Bad For Customers)
Customers were confused by the breakup and outraged by the price hikes. As a result of the changes and price increases, the company lost nearly 800,000 subscribers in the third quarter. (See: A "Spectacular Collapse": Netflix Loses 800,000 Subscribers, Stock Plunges 35%)
After such intense backlash, Hastings issued an apology to customers and announced the company's plan to backtrack on the decision to split the company.
"I messed up. I owe everyone an explanation," he wrote on the company's website. "It is clear that for many of our members two websites would make things more difficult, so we are going to keep Netflix as one place to go for streaming and DVDs." (See: Netflix Backtracks − Abruptly Cancels Plan To Spin Off DVD Business)
So are Netflix's best days behind it?
It is hard to tell right now, says Finkelstein, but what is certain are the two key problems facing the company:
1) Growing competition from companies like Amazon and Google and
2) Rising licensing fees for the movies they hope to rent and stream.
I wonder how Jon(I sincerely don't know where the money is)Corzine escaped his wrath?