Can Netflix CEO Reed Hastings Bounce Back?

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Netflix (NFLX), we have a problem.

CEO Reed Hastings doesn't need to rent a copy of Apollo 13 to know that his company has hit some turbulence. The beleaguered Hastings -- inspired to co-found Netflix after being hit with roughly $40 in late charges on an Apollo 13 rental -- isn't getting a lot of loving from the media, subscribers, and shareholders lately.

If the poorly received rate hike and Qwikster fiasco didn't leave you questioning Hastings' ability to lead the video buffet operator, Monday night's problematic quarterly report should do the trick.

Greed Hastings

There was a lot not to like about Netflix's latest quarter.

Forget the fact that the fallen tech darling closed out the quarter with 800,000 fewer domestic subscribers -- and 300,000 fewer overall subscribers -- than when the period began. When Netflix warned that it would lose a net of 600,000 stateside subscribers it was a call made in mid-September, days before the Qwikster fiasco. Everyone assumed things would be worse than last month's update.

However, the current quarter will be another heartbreaker.

Netflix may be eyeing a sequential increase in unique subscribers, but it's sort of an illusion. It sees a slight dip in streaming accounts and a sharper decline in customers paying to receive DVDs by mail. If this sounds confusing, it essentially means that a lot of the subscribers paying $7.99 a month to stream and at least $7.99 a month for unlimited DVDs will be choosing one or the other. In short, the unique subscribers will hold up, but revenue per subscriber is going to take a hit despite the summertime rate hike as couch potatoes scale back.

The outlook gets bleaker as we head into 2012. The company expects to lose more money overseas than it earns domestically. Add it up and you have a company whose bottom line will take on the same reddish hue as its DVD mailers during the first few quarters of next year.

The stock has taken a beating since peaking at nearly $305 in July. Can Hastings survive as CEO after seeing his stock shed more than two-thirds of its value?

Where's the Mea Culpa?

There's been a recurring theme through the strategic missteps and fumbled apologies: Hastings feels that Netflix is simply moving too fast.

"What we misjudged was how quickly to get there," Hastings explains in Monday night's letter, referring to the decision to begin charging for its streaming and DVD plans as two distinct services.

"There is a difference between moving quickly -- which Netflix has done very well for years -- and moving too fast, which is what we did in this case," Hastings stated earlier this month in nixing Qwikster.

Where's the humility? Where's the mea culpa? Netflix is worth less than a third of what it was three months ago, and it almost seems as if Hastings is insulting his customers because they're too slow. If we're to believe this logic, Netflix's management is so ahead of its time that we're just not capable of appreciating Hastings as a visionary.

It won't matter. When shareholders are poorer and customers are fewer, someone has to pay. As the face of Netflix, Hastings has made himself an easy target.

In Defense of Hastings

It's not easy to force out a co-founder, especially one who has had a decade of success before this lamentable summer.
Hastings is a star outside of Netflix. He sits on the board of Microsoft (MSFT). He has made cameo appearances at Apple (AAPL) new product presentations. Even if these feats would seem unlikely to repeat on this side of the Qwikster collapse, he's still the guy who grew an entertainment subscription service from zero to more than 25 million global subscribers.

Shareholders want blood. Couch potatoes want blood. The financial media want someone to crucify. Hastings is too easy a target, but that doesn't mean it will happen.

If Netflix's descent continues, someone is more likely to buy the company out before the battering rams force Hastings into resigning or the company's board calls for his ouster.

In short, folks better get used to Hastings sticking around as CEO.

This doesn't mean he can continue to mismanage Netflix the way he has in recent months without any kind of ramifications. Investors, after all, do own the company. However, Hastings is lucky on that front. The next annual shareholder meeting probably won't take place until June, giving Hastings time to win back streaming subscribers (something he expects will begin happening in December) and prove that costly international expansion will be worth the near-term financial pain.

Hastings has a lot of messes to clean up. The roundtrip from tech hero to laughingstock to tech hero is going to be a long one. Learning how to avoid backhanded apologies will make that trip a whole lot easier for him.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any stocks in this article, except for Netflix. The Motley Fool owns shares of Apple and Microsoft. Motley Fool newsletter services have recommended buying shares of Netflix, Microsoft, and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft and Apple.





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7 Comments

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Progressive Patriot

Don't give Hastings too much credit. Netflix's success was just as much about the incompetence and mismanagement at it's principal competitor Blockbuster. Now their competitors are Amazon, Apple and a revived Blockbuster/Dish. Amazon in particular is gaining on them and in my opinion is the better value. Furthermore, content providers are demanding higher prices and Netflix does not have the capital to compete. They better pray that they get an acquisition offer otherwise they may file Ch 11 within next two or three years.

October 27 2011 at 5:10 PM Report abuse rate up rate down Reply
Mutterwolf

They should re-establish themselves as the destination of choice for media - DVD or streaming.
1) They need to be aggressive in fighting for Net-Neutrality. If cable and phone companies can charge more or throttle back your data as they see fit, it will hurt streaming.
2) They should buy Hulu or contract with all the stations and channels as a cable or satellite company and sell monthly subscriptions al-a-carte. Only buy the channels you want, treat them all like a giant DVR and stream it all thru your x-box, PS3, wii, or blue-ray dvd player. Or your smart phone where ever you are.
3) Continue to improve the DVD back catalog. There are tons of older, art, independent and foreign films that still can't be found in streaming and are only in hard to find DVD.
4) License permission to create a streaming content on every DVD in the catalog. Pay owner/creators for every streaming.

October 27 2011 at 12:39 PM Report abuse rate up rate down Reply
domcon

Exactly the kind of corporate greed the wall street protestors are drawing awareness to
Hope new company begins and competes head to head vs N flix

October 26 2011 at 5:04 PM Report abuse rate up rate down Reply
Brad

Seems to me there is away for Netflix to recoup ? Has anyone come up with the idea of cutting the currewnt increase in fees. That just might let the people know yes we made a mistake we are fixing it. Yes costs are increasing, may be not cut the increase 100% but 50% might be a good idea, and let the custoners know they were heard.

October 26 2011 at 10:12 AM Report abuse +1 rate up rate down Reply
bmiller616

He did not make the decision, his board did.. So he is not to blame... BUT they made a mistake and now they suffer for it. If I were them, I would sell the company....

October 26 2011 at 10:06 AM Report abuse rate up rate down Reply
richardkenosha

Done with Netflix. They drove everyone out of business and now they are going to keep raising prices. Forget it! Keep you movies and your streaming. One more thing don't you people check your DVD's before you throw them in a mailer? Some look like they have been through a hockey game and are unplayable. So I sit with no DVD that I wanted why you druge up a replacement and I have to wait for the bad DVD toi get to you. No compensation at all. You had a good thing and you ruined it. I won't be back.

October 26 2011 at 9:32 AM Report abuse rate up rate down Reply
crispinjac

The challenge for me regarding the price hike this summer was that I felt violated by a brand that I had once felt glad in which to be associated. I was one of the early adopters for the DVD and later one of the early streamers. Before there were Netflix enabled DVD players, I purchased Roku. I was happy to pay the $18.00 per month year over year from Netflix's beginning.

Then there was the announcement, which I read on Facebook (Netflix has had my email and address for many years but never considered sending its customers any advanced notice. As they say in the westerns, "I was dry gulched!") . The implication of "sucker" reaked from news release.

Now, I am beyond the anger. After all these years, I feel so strongly about this treatment from a brand I had once admired, to behave so out of character with such wanton disregard for the market it created, that I will never consider becoming a Netflix customer, again.

Brand loyalty and the brand promise keep customers from switching when other similar options emerge in the marketplace. Both the Netflix promise and my customer loyalty disintigrated after this cavelier treatment of my business to them.

Now, Netflix can have their business and eat what's left of their cake, because they won't have this customer to kick around any more.

October 25 2011 at 7:49 PM Report abuse +1 rate up rate down Reply
thescot

CEO is a moron, he thought that he had created a monopoly and people would be forced to go with his ridiculous price increases, well they told you that you don't know Jack Sh** about consumers. You will be lucky if you survive this gaff.

October 25 2011 at 4:47 PM Report abuse rate up rate down Reply