Netflix: A Year in Review

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Sometimes you have bad years, and then you have a colossal implosion on the level that Netflix's (NAS: NFLX) CEO Reed Hastings is now experiencing.

Even some of the video buffet operator's biggest critics had a hard time saying something bad about Hastings earlier this year. The bearish argument on Netflix revolved largely on valuation. Long-term concerns about the model's viability and the way that the company accounts for its content licensing liabilities were other naysayer knocks. But knocking Hastings? Never!

Well, with Hastings' name bubbling up near the top of most "Worst CEO of 2011" lists, it's time to break down the year that once began so promisingly for Netflix.

Things started out well for Netflix. The stock had nearly doubled in 2009, going on to more than triple in 2010. Netflix had proven its recession-resistant mettle by drawing a horde of new subscribers, kicking off 2011 by topping 20 million members.

The warning signs that investors missed
Even though Netflix's stock would go on to nearly double again by the summer of 2011, there were already signs that things were starting to come undone.

Amazon.com (NAS: AMZN) began offering customers who were paying $79 a year for Amazon Prime memberships -- a program that features free two-day shipping on Amazon-warehoused goods -- unlimited access to a small yet growing digital catalog of streaming titles in February. In a sense, Netflix had its first true big-name competitor.

A month later, AT&T (NYS: T) became the latest broadband provider to cap data usage on its DSL home service. As the country's biggest primetime data hog, Netflix is responsible for a growing chunk of the bandwidth that broadband customers go through in any given month. If more providers follow suit, Netflix's value proposition won't truly be unlimited.

March was also when CBS's (NYS: CBS) Showtime decided to pull early seasons of Dexter and Californication from Netflix's digital catalog. Instead of hoping to hook subscribers to the premium movie channel by giving them a taste of its content -- and cashing in on juicy streaming revenue along the way -- Showtime apparently felt that it was more important to protect the priced prestige of its shows. It may not have seemed like a big deal at the time, but it should have alerted investors that licensing deals go in both directions long before Liberty Media's (NAS: LMCA) Starz decided that it would not be renewing its meaty content deal that provides Netflix streaming with many of its first-run celluloids.

Look out below
In retrospect, the market misinterpreted Netflix's biggest blunder. The day after Netflix alienated its customer base by announcing that it would raise prices on some of its plans by as much as 60% -- essentially turning the streaming service that was available at no additional cost to customers on unlimited disc plans into a premium offering -- the stock went on to hit its all-time high of $304.79.

Yes, Hastings' biggest blunder is one that was initially applauded by many analysts and investors. Go figure.

International expansion plans became aggressive. Canada's launch in late 2010 inspired Netflix to establish a streaming-only service in 43 different countries through Latin America and the Caribbean this September. By the time that Netflix announced plans to enter Ireland and the U.K. in early 2012 -- and that the move would lead to an initial overall deficit -- investors began to realize that there was a price to pay for Netflix's globe-trotting ways.

Also lost in the excitement -- when Canada hit a million subs in its first year up north -- was the fact that net additions were decelerating after its first complete quarter in Canada.

Subscribers were miffed. Expansion wasn't cheap. Starz was starting to pack up its copies of Toy Story 3 and Sling Blade for an early 2012 exit.

However, Hastings' biggest truly boneheaded move was yet to come.

Qwikster quandary
How could Netflix distance itself further from its already alienated user base? By telling its biggest customers -- the ones on dual plans who were the only ones hit with the summertime rate increase -- to take a hike.

The proposed plan to split Netflix into two distinct sites, forcing DVD and Blu-ray renters to manage independent queues at both Netflix.com and Qwikster, was a disaster. It was a call that Hastings thankfully reversed a few weeks later, but not before it was broadly lampooned.

Netflix's already tarnished reputation met a wrecking ball.

Could things get any worse? You know the answer. Customer defections proved to be worse than Netflix had originally feared in its latest quarter, and now Netflix sees red ink for all of 2012.

The moat that began the year as impenetrable finds a Netflix that is truly vulnerable. Coinstar's (NAS: CSTR) Redbox and DISH Network's (NAS: DISH) Blockbuster are hoping to swipe Netflix's DVD rental business, while Amazon and others waiting in the wings have their sights set on gobbling up market share in streaming.

If 2011 was a dream, then it surely was a bad one. The stock that seemed as if it would pull off another market-thumping performance this year has shed 60% of its value, and we still don't know when the situation will stabilize.

Good luck in 2012, Hastings. You're going to need it.

If you want to follow this saga, track the latest news by addingNetflixto My Watchlist.

At the time this article was published The Motley Fool owns shares of Amazon.com.Motley Fool newsletter serviceshave recommended buying shares of Netflix and Amazon.com. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.Longtime Fool contributor Rick Munarriz has been a Netflix subscriber and shareholder since 2002. He does not own shares in any of the other stocks in this story, except for Liberty Media. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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