Netflix Has Been Here Before


Netflix (NAS: NFLX) CEO Reed Hastings has had a lot to say during his company's brutal September. Now it's time to give Marc Randolph a turn.

Marc who?

It's OK if Randolph's name doesn't ring a bell, even though he was instrumental in Netflix's birth process. He co-founded Netflix alongside fellow software executive Hastings in 1997. He was its first CEO.

Reflecting on his brief tenure at the helm of the company that would go on to reinvent the way couch potatoes vegetate, Randolph gave a unique perspective on the recent gutting of Netflix's brand by consumers in recent weeks.

The 5% solution
Randolph recalls another difficult decision that upset Netflix users on the other side of the millennium. Netflix wasn't offering unlimited DVDs -- and much less streaming -- at the time. Netflix rolled out as a traditional rental service in 1998 with due dates and late fees. There was a website. DVDs were shipped by mail. However, it wasn't the carefree buffet that subscribers enjoy today.

Netflix allowed its early renters to purchase the DVDs that they were renting, and it turned into a better business than the company imagined. Randolph estimates that as much as 95% of its revenue was coming from the sale of DVDs at one point.

In a gutsy move, Netflix decided to discontinue the practice of selling discs. Most of its users were buying DVDs through the company, but focusing on one aspect of the business -- just as Netflix plans to do now by splitting Netflix streaming from Qwikster disc rentals -- paid off.

Netflix's marketing message became stronger. Conversion rates improved. Innovation ensued, creating the Netflix that we know today.

"I risked alienating tens of thousands of customers," Randolph writes. "Reed is showing that he has courage and conviction to do the right thing despite having tens of millions of them."

It's a meaty anecdote. As bad as things seem these days, Netflix has been here before.

From hero to zero
Netflix was named one of Fortune's "50 Most Admired Companies" back in March. It's unlikely to make the cut next year.

The pricing change. The lost content. The fumbled apology. The Qwikster walking papers.

It's been too much for subscribers, but this isn't the first time that users have taken a battering ram to the cats from Los Gatos. We've gone through price hikes, service outages, and new fees for Blu-ray watchers in the past.

Is it different this time? Netflix is targeting just 24 million domestic subscribers by the end of this week, less than the 24.6 million accounts it watched over three months earlier. As bad as Netflix has stumbled in the past, did it ever close out a quarter with fewer subscribers than it started with?

Yes. Four years ago, when Dish Network's (NAS: DISH) Blockbuster -- then a cutthroat independent -- slashed prices to make a dent in Netflix's model, it did lead to net subscribers shrinking from 6.8 million to 6.7 million during the second quarter.

Again, Netflix has been here before.

It's another fire sale
Bloomberg is reporting that Netflix's freefalling share price since peaking this summer makes it a tempting buyout target for Google (NAS: GOOG) or (NAS: AMZN) .

It's not going to happen. There isn't even a rumor going around. It's little more than analysts dreaming out loud. Don't bet on it.

As shell-shocked as investors are feeling these days, they're not about to cash out at anything close to half of July's highs. By the same token, Google and Amazon aren't going to pay much more than that, because the buyout would sink their own companies.

This is just another round of hollow buyout chatter. Amazon, Google, and even Microsoft (NAS: MSFT) have been tied to Netflix in the past -- with Big G and Mr. Softy having the financial means to pull this off with its balance-sheet greenery. Hastings sits on the Microsoft board, you know.

It doesn't matter. It's not going to happen.

Again, Netflix has been here before.

It'll get over these humps. It may not happen right away. I wouldn't be surprised to see another quarter of net domestic defections to close out the year. However, things will get better after that, considering the alternatives.

Things will get better, until the next miscue -- ideally at much higher levels than before.

Netflix has been here before, and it will be here again.

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

At the time thisarticle was published The Motley Fool owns shares of Microsoft and Google.Motley Fool newsletter serviceshave recommended buying shares of, Microsoft, Google, and Netflix.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Microsoft and a bear put spread position in Netflix. 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. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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