Why Reed Hastings Doesn't Get It

(NAS: NFLX) stock rose nearly 7% after the company announced that it won't be splitting apart its DVD and streaming services after all. But before you get too excited, here's why abandoning Qwikster is another bad sign for investors.

Critics, including myself, were quick to point out that the Twitter handle for "Qwikster" belonged to a young man who tweeted about sex and drugs and whose profile picture was the lovable Sesame Street character smoking a joint. The pot-smoking Elmo became a mascot of sorts for everything that was wrong with the Netflix/Qwikster split and was ultimately an embarrassment.

But Elmo is a red herring. The real problem lies in how the plan got as far as it did.

The decision to not split off the two sites was the right one, but the Qwikster debacle brought to light some very disturbing structural issues within the Netflix foundation.

Picture for a minute the conference table around which these decisions are being made. Imagine someone has said: "We should increase rates, split off our services, and require two logins and accounts. Don't worry. It'll be easy, and customers will love it."

When I try to imagine what happens next, I hear only crickets. Because clearly, no one spoke up, or if someone did, he or she was overruled. This leads me to believe one of two things is happening at Netflix. The first option: CEO Reed Hastings is making these decisions by himself, and he's not listening to his staff. The second: There's a team of people making bad decisions collectively.

Both prospects are rather frightening.

Netflix could have rolled out Qwikster to a trial group on a six-month basis. Internally, the six months could have been used to test out the name, secure necessary rights to social-media handles, and work out logistical kinks. At a minimum, Netflix could have sent an email survey to all members asking, "Hey, how do you feel about this?"

When quitting Netflix, I was given a series of questions to fill out. They included -- and I'm paraphrasing -- lack of time for television, going to a competitor, and so on. Netflix didn't ask whether I was leaving because of the price increase, or because I didn't want to create a separate account on Qwikster. That's like having exit interviewers standing outside voting booths and asking, "Do you prefer a Hershey bar or a Tootsie Roll?"

In the midst of all the fallout over the price increase and split, Netflix posted an ad for a " Consumer Media Relations PR Manager." Among the qualifications: Be an adult. The ideal candidate is "a mature, fully formed adult with a happy, well balanced life" and "motivated by what is best for Netflix." As someone with a graduate degree in corporate and public communications, I feel it necessary to tell you that if your company is in the midst of a communications crisis, you don't post an ad on Craigslist saying you need to hire a grownup to handle your PR.

Netflix's competitors aren't squeaky-clean, of course. Amazon.com's (NAS: AMZN) gotten in trouble for paid reviews on its website. Before it declared bankruptcy and was subsequently purchased by DISH Network (Nasdaq: DISH), Blockbuster faced lawsuits over its late-fee policy. Comcast (Nasdaq: CMCSK) was publicly derided for cronyism after hiring the FCC commissioner who voted in favor of the company's acquisition of NBC. But when you're Netflix and you have only one product, splitting it, increasing rates, and spinning it off in a matter of months tends to have a pretty big impact.

It would be a mistake for Fools to think the worst is behind Netflix. The company will be fine ... until the next technology, the next competitor, the next public-relations disaster. The Qwikster fiasco shows that Netflix simply doesn't understand its own business. And although Netflix may regain some of its market share, the days of a $300 share price are long gone. 

Am I wrong? Are you sticking with Netflix? Let me know below.

At the time this article was published Fool contributor Molly McCluskey owns no shares in any of the company mentioned. Motley Fool newsletter services have recommended buying shares of Netflix and Amazon.com and creating a bear put spread position in Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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brujae

I've been a two DVD subscriber for several years and do some moderate streaming when traveling and my grandkids stream it quite a bit when visiting. I didn't get upset with the price increase and I held a wait and see attitude on the Qwikster idea. I did drop Netflix several years ago for a few months when it seemed like I was getting unfairly treated over new releases. As a multiple disc subscriber (I was getting 3 at the time) I was given the back seat to single disc subscribers over new release availability. But I came back after a few months of Blockbuster bs and outrageous pay-per-view costs. As a shareholder I got out at 285 and have been buying back in in the low hundreds. I agree that they have shot themselves in the foot over their latest PR nightmare and hope they can right the ship before it completely sinks. I feel their best move would be to give something back to their customers, maybe offer free streaming for a year with a disc subscription or kicking in a bonus disc every month..something to assuage the bad feelings it's been creating lately. I agree with this author , Netflix has grown out of touch with what made it great to begin with. Maybe it's time to get basic again if it's not too late. I have some sell limits in place in case they don't.

October 12 2011 at 4:57 AM Report abuse rate up rate down Reply