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.

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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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