Log in

Analysis: The Netflix Implosion Continues

25 Oct, 2011 By: Erik Gruenwedel

It’s not often you see a train wreck happen right in front of you. That’s the impression following Netflix’s third-quarter results and requisite analyst call — the latter underscoring the former Wall Street darling’s precipitous fall from grace.

Reed Hastings, CEO of the once high-flying by-mail disc rental pioneer, has become a punching bag for shareholders and subscribers after a series of well-publicized gaffes that have seen the company’s market value plummet nearly 60% (about $9 billion) since June. And that was before the stock sank another 28% in after-hours trading Oct. 24.

The latest culprits: a record subscriber loss due to a recent 60% price increase to Netflix’s popular hybrid streaming-disc rental program, and aborted attempt to separate disc rentals from streaming. That subscriber exodus now is undermining ambitious international expansion that Hastings nonchalantly said could keep Netflix in the red through much of 2012.

And Netflix, up until now, never has posted a loss. The news was enough to send some short-sellers into overdrive, including bloggers on fiscal website SeekingAlpha.com who characterized Netflix as a pending dot.bomb on the scale of former online grocery bust Webvan.com.

A few notable comments came from Netflix’s ubiquitous fiscal call Q&A format whereby analysts emailed questions in advance (no phone calls) that were answered out loud by Hastings or CFO David Wells. Hastings' answers, in particular, underscored a desire to restore Netflix's reputation while at the same time professing an aloofness that continues to undermine.

Case in point: In response to a question about whether Netflix might consider altering marketing campaigns going forward, Hastings said, “Our marketing has been very successful for the last several years, and we don't plan on any substantial change to it.”

Really? Netflix's over-hyped stock is in a freefall and perception about the service in the media is negative but the CEO wouldn't alter marketing the brand even a bit going forward.

Hastings, in response to a question about the rationale for building (and then quickly shuttering) a separate DVD business called Qwikster, offered, “Well, in hindsight, it’s hard to justify.” Then, as if to underscore that little was learned from the debacle, Hastings reiterated, “Going forward, we’ll be very aggressive on promoting streaming Netflix … and anyone who wants to subscribe to DVD will be very welcome, but we’re going to be pushing and promoting streaming.”

In other words, if you want to rent a disc, go to the end of the line. This is a strange strategy considering nearly 14 million Netflix subscribers at the end of Q3 professed a desire to rent discs, and physical rentals underwrite streaming expansion (see below).

While streaming no doubt is the future of home entertainment, Netflix's cold shoulder to disc rentals is what contributed to its current fall from grace. Retail sales of physical discs are certainly in decline but interest in the format for rental isn't. Check out a local Redbox or Blockbuster Express kiosk, chances are good someone is renting a movie from one right now.

With all emailed questions answered in less than 30 minutes, Ellie Mertz, VP of investor relations, then welcomed phone queries — an odd request given the Q&A session was available via webcast only.

One analyst managed to get through and asked about the value of the disc rental business to Netflix other than as an apparent cash cow in the short-term. To that, Hastings said, “It’s a source of profits funding our international expansion. ... It’s a source of satisfaction to more than 10 million members who subscribe to our DVD service, whether they also subscribe to streaming or not.”

That’s a puzzling admission for a business segment Netflix management continues to pay lip service to and has all but thrown to the curb. Hastings, seemingly unaware of that few analysts were on the phone, then ended the call by suggesting that the lack of follow-up calls implied Netflix management was doing “a good job.”

Indeed, in early morning trading, Oct. 25, Netflix's stock continued to decline, down another 8% to around $75 a share. 



Add Comment