What if Reed Hastings Isn't Stupid?
Everyone has it out for Netflix (NAS: NFLX) these days.
The video giant that was one of the country's most-respected companies just a few months ago is quickly becoming one of the most-loathed. Business schools will be dissecting this summer of discontent -- this September to dismember -- for years.
If you think the Boston Red Sox or Atlanta Braves are choking down the stretch, they have nothing on Netflix.
CEO Reed Hastings appears to be making things worse, ironically pivoting from a half-apology for miscommunication on Sunday night to deliver a new wave of obfuscation.
Since peaking at an all-time high just two months ago, Netflix shares have been shredded by more than half.
A cynical note to Hastings: Could you have at least thrown Whitney Tilson a bone, letting him know a few weeks ago that it was a good time to re-establish his short position?
Don't count Hastings out
I've been following Hastings since I became a Netflix shareholder nine years ago. I have spoken to him a few times over the years. Hastings isn't a friend. I've learned that getting chummy with CEOs blurs perspective.
However, tracking Hastings has treated me to more than a few moments when this cat was flat out ahead of the times.
Let me take you back to 2004.
Shares of Netflix fell 40% in a single day after the company slashed its monthly rates by $4. Netflix had just bumped its rates higher a few months earlier, so the margin-chomping haircut was a shocker. It wasn't Blockbuster -- now owned by Dish Network (NAS: DISH) -- that forced Hastings' hand. The company explained that sources were telling it that Amazon.com (NAS: AMZN) was readying an entry into DVD rentals by mail.
It never materialized, and Hastings was portrayed as a modern version of Don Quixote, tilting at windmills at shareholder expense. The stock dropped to $10, and there were just 2.2 million Netflix subscribers at the time. Amazon turned its attention to Europe, so clearly it was eyeing a stateside foray.
Hastings was right. The stock gains and subscriber growth since then bear that out.
Let's bump ahead a few years to 2007. Netflix rolls out streaming. It's limited to PCs. There are just 1,000 titles in its digital catalog initially. The market is unimpressed. I'm mixed on the news.
"This is the first digital step for a company walking a treacherous tightrope," I wrote at the time. "If it makes online delivery too popular, Netflix will erode the real-world competitive advantage it derives from its regional distribution centers and proven interface. There are just too many cable providers and online juggernauts jockeying for position in digital delivery."
Well, we see how well that played out. Netflix expects 21.8 million of the 24 million domestic subscribers it is targeting by the end of next week to be on a plan that charges $7.99 a month for unlimited streaming.
The cable heavies and dot-com giants never posed much of a threat. Amazon stuck to the piecemeal digital model until adding a Netflix-like streaming smorgasbord for Prime subscribers earlier this year. Apple (NAS: AAPL) doesn't appear to have any intentions of becoming a video buffet operator. Cable and satellite companies are just now starting to take the TV Everywhere initiative seriously.
Cutting both ways
Aren't the analysts trashing this Qwikster move the same ones who pushed Netflix to new all-time highs in July after it announced the price hike? The market generally loved the move.
"What if Netflix is wrong," I argued against the current at the time.
"Amazon is suddenly in a better position than anyone else to exploit Netflix's new vulnerability," I wrote a week later, when Amazon grew its digital library by 33%.
"Netflix is barreling toward the mother of all wake-up calls," I warned after July's rosy outlook.
I saw the pitfalls, even with my shareholder bias. Why did everyone else miss them?
The market was too euphoric two months ago, for something that any rational investor could see was problematic. Why is the market so pessimistic now for something that may ultimately be opportunistic?
I don't like the Qwikster move. The name is hokey. Inconveniencing 14.2 million of its disc-swallowing couch potatoes is dangerous. However, why isn't this yet another case of Hastings seeing what everyone else is missing?
Why isn't anyone praising the potential of the Netflix brand -- now a thriving global export -- as an exclusive streaming service? Why isn't anyone applauding Qwikster's newfound flexibility, since it's now following Blockbuster and Coinstar's (NAS: CSTR) Redbox into video games? What if there are favorable state sales tax implications in the split that no one is discussing?
What if all of this friction between the streams and the stream-nots creates two stronger businesses than Netflix alone? Would it have been preferable to see Netflix meander about until discontinuing optical discs in a few years when they bump up against the gate of obsolescence? Focus will serve streaming well now, as it extends the life of discs by mail.
Once again, the market is underestimating Hastings' vision. Why won't it end any differently this time?
If you want to follow the plot twists in this saga as they occur, add Netflix to My Watchlist.
At the time this article was published The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Amazon.com, Apple, Netflix, and Coinstar. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a bear put spread position in Netflix. 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.Longtime Fool contributor Rick Munarriz has been a Netflix shareholder and subscriber since 2002. He does not own shares in any of the other stocks in this story. Rick is also part of the Rule Breakers newsletter 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.