All those interested in a career in public relations need not look any further
than the current maelstrom that surrounds Netflix (NASDAQ: NFLX ) and its
decision to split its video streaming and DVD rentals into two separate
services. The backlash has been severe, with its stock falling 50% in just two
months. Speculation is rampant that this provides an opening for Google (NASDAQ:
GOOG ) or Amazon (NASDAQ: AMZN ) to acquire Netflix, and the chatter so far has
kept its stock price from plummeting further. With intense competition on the
horizon, expect the downward spiral to accelerate below the $100 mark. The Wall
Street darling's reign is over, and its not coming back. Here's why.
Good/Bad Decision On the surface, I can understand Netflix's decision to split
the two services. The DVD business while the girl that brought you to the dance
is low-margin and painstakingly boring; the streaming business is oh-so-now and
high-margin. Also, Hollywood content providers are putting the screws to digital
streamers like Netflix by requiring a fee per user per month. When you have 24.6
million subscribers, it gets expensive fast. Netflix didn't want to pay for
all its subscribers when only a percentage of them were actually streaming. It
had two choices: either continue negotiating on a flat yearly fee for the right
to distribute content, or split them up. It chose the latter. From a business
perspective, that makes a lot of sense. What doesn't make sense is its
decision to up the monthly fee of $9.99 for both to $15.98. That's a 60%
increase. At a time when America is reeling, the arrogance of such a move is
palpable, and trying to brush the increase under the rug with a sin of omission
is even worse. Reed Hastings might have been a good CEO at one time, but no
longer. Netflix's move has both angered its loyal customer base and
re-energized its competition in both businesses. According to research firm
Frank N. Magid Associates, up to 7.4 million of its users still are seriously
considering canceling their subscriptions. Talk about jeopardizing the goose
that laid the golden egg.
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