Is Reed Hastings Fit to Be Netflix CEO?
Oct 25th 2011 1:58PM
Updated Oct 25th 2011 2:26PM
Now we know why Netflix (NAS: NFLX) ended Qwikster before it began. More than 800,000 subscribers quit the service last quarter amid changes made by CEO Reed Hastings and his team, far more than Wall Street expected and enough to lead investors to dump the stock in afterhours trading last night.
My Foolish colleague Anders Bylund will be running down the numbers in the earnings report. I'm writing to dig into a bigger question I'm increasingly hearing from subscribers and investors alike: Does Hastings know what he's doing?
"I wish I could make a horrible decision and only after everyone knows it was horrible, apologize and be hailed a prophet," wrote All-Star investor BillKaufman in response to the Qwikster reversal.
He and many others wondered why Hastings was praised for backing off a decision that almost everyone outside the company knew was bad from the get-go. Or as Foolish investor JeF4y put it in commenting on the sorry-we-were-just-kidding nature of the change: "It's like they're playing a bizarre game of 'what [else] can we do to erode market confidence and shareholder value?'"
It is time for Reed to go?
Shares of Netflix are poised to fall substantially in today's action, wiping out a 1% gain eked out in the aftermath of the Qwikster debacle. The free fall forces a question implied by yet another comment by our Foolish readers.
"Hastings' maneuvers have demonstrated such a consistent ineptitude, they're as entertaining as some of their flicks!" wrote arefool2b. Really? If that's true -- if Hastings really is inept -- then shouldn't the board fire him? I'm not so sure.
But it would also be folly to simply dismiss concerns. To be fair, we ought to look at what happened with both Qwikster and the price increase and then assess whether the mistakes and the ensuing responses were legitimate, ill-conceived, or inept.
The 60% price hike
Netflix announced in July that it would end inclusive plans by Sept. 1. Subscribers who wanted both DVDs and online streaming would have to pay for two separate plans, $8 apiece. Previously, renters could check out one disc at a time and enjoy unlimited streaming for $10. Thus, the infamous 60% price increase.
Was the move legit, ill-conceived, or inept? It might be too early to tell, but the initial numbers suggest a problem. As my Foolish colleague and Motley Fool Rule Breakers teammate Rick Munarriz points out here, there were plenty of disc-only subscribers who used the service happily before the price change. Now, they're fleeing -- and in far greater numbers than those who were opting for streaming-only plans. That's a huge problem.
Hastings seems to know it, too. "Moving forward step by step, despite the foot with the bullet hole," he said in announcing a deal with DreamWorks Animation (NYS: DWA) via his Facebook feed last month.
We don't know exactly what Hastings sees as the "bullet," but it's a good bet he knows that a price hike got people thinking about alternatives. My own conversations with friends revealed that many who had tried Redbox intended to commit to the service and dump Netflix. Still others said they were getting enough streamed content from cable and satellite providers to feel comfortable canceling Netflix. Now we know this wasn't just talk. Subscribers fled in huge numbers.
Qwikster or quicksand?
When Netflix first announced Qwikster, media and investors alike focused on new burdens it would place on users. A separate website. A separate login. No more consolidated queues, no more comprehensive recommendations. DVD and streaming would be entirely separate businesses held by Netflix.
Was the move legit, ill-conceived, or inept? I'd say inept, if only because I can't think of a single Netflix subscriber who liked the idea. If anything, the confusion created by splitting the services led my Foolish colleagues to wonder if Amazon.com (NAS: AMZN) would seize the moment to kill Netflix.
Qwikster also made Hastings seem unfocused and desperate. Hastings announced the change in an otherwise contrite blog post about mistakes made in announcing the price increase. He also announced plans to compete with GameStop (NYS: GME) and DISH Network's (NAS: DISH) Blockbuster in renting console video games via Qwikster. Netflix the leader had suddenly become a follower.
The opportunity ahead
Judging by his comments during last night's call, I'd say Hastings knows he screwed up. "After the price increase, Qwikster became the symbol of Netflix not listening," he said.
He's right. Netflix had a good thing going before Qwikster -- a comprehensive service that, whether it wanted to admit it or not, Hollywood had become dependent upon. That's still true. Even if 800,000 have left for Hulu or Amazon or some other service, millions of us still rent DVD and Blu-ray movies via the red envelope.
So while Hastings and team have work to do in order to restore Netflix's reputation, the task is probably easier than today's sellers think it is. Customers who've suffered through this summer's debacles aren't likely to leave now.
Which brings us back to the question we led with. Should the board fire Hastings? I can't see it. Yes, he made mistakes in rolling out the price increase. Yes, Qwikster was a bad call. But Hastings has also admitted both errors and is working to make good. There isn't much more we can ask from a leader.
Let's also remember that we're far from figuring out a comprehensive licensing structure for on-demand content. Netflix is a key player in the debate, having decided not to pay $300 million to re-up with Liberty Starz (NAS: LSTZA) . Do you or don't you want Hastings at the table for these discussions?
Count me among those who'd much rather have him negotiating for Netflix. We've already seen what he and his team can do. They've replaced Starz with DreamWorks and a new direct deal with AMC Networks (NAS: AMCX) that includes the popular post-apocalyptic drama, The Walking Dead.
Call it symbolic. Netflix may feel like the walking dead today, but with Hastings at the helm, I suspect it won't be long before the company is walking tall again. Technology is becoming an increasingly important part of how we live our lives, and also in how we invest. The Motley Fool recently compiled a research report detailing another massive opportunity in the technology field, free of charge for our readers. I invite you to grab your free copy by clicking here.
At the time this article was published Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Netflix at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.The Motley Fool owns shares of GameStop. Motley Fool newsletter services have recommended buying shares of Netflix, Amazon.com, and DreamWorks Animation SKG. Motley Fool newsletter services have recommended writing covered calls in GameStop. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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