It's no secret that Netflix's (NSDQ:NFLX) stock price has fallen off a cliff. Long a Wall Street darling, the company has shed half it's market capitalization in the past 60 days. On July 14, the stock was $300 a share; yesterday it closed at $143. Naturally there has been some scrambling on the part of management, and even a little contrition on the part of CEO Reed Hastings.
Yesterday the company announced what may be its biggest blunder to date. And somebody really needs to get fired behind this one. Of course I'm talking about Netflix splitting off its DVD rental operation and calling the new entity Qwikster. Aside from all the fundamental reasons why this was a bad move (still the company's bread and butter, just went through a pricing debacle, etc...) this is an absolute marketing disaster.
Didn't anyone at Netflix do any market research before they came up with this name? If they had, they would have found that another company tried (and failed) to re-brand themselves by changing their name to something far too similar.
Hoping to cash in on the Internet craze in 1999, Amway changed their name to Quixtar. I don't need to tell you that Amway isn't exactly held in the highest esteem among American consumers. Evidently they tried to move their multi-level marketing scheme online under the auspices of the new Quixtar name (and in turn shed the negative connotations associated with the Amway name). It was more or less a disaster, and a few years ago they abandoned the Quixtar name and went back to plain old Amway.
But that's not all. In today's world where social media can make or break a company, you'd think that someone over at Netflix would have checked to make sure the Qwikster Twitter handle was available.
It is not.
In fact, it's held by a half-smart stoner named Jason Castillo whose Twitter avatar is Tickle Me Elmo smoking a joint, and who is responsible for such Twitter poetry as:
Bored as shyt wanna blaze but at the same time I don't ugh fuck it where's the bowl at spark me up lls
and
Don't bother telling me who my ex is now dating ! Cuzz now I feel bad for the bitch that has my sloppy seconds :)
Seriously Netflix? That is some Amateur Hour shit over at corporate strategy.
If I were a Netflix shareholder (disclosure: I am not), I would be furious right now. Not only is splitting the company a questionable strategy to begin with, but to do so in such a half-assed manner is inexcusable.
I'm thinking they should replace Reed Hastings with Jason Castillo. The decision making couldn't get much worse, and at least they'd own the Twitter handle.
If by segmenting the business model it creates a better product within the streaming video market (i.e., more movies, more subscribers), then I'm all for it. It is by far the most calamitous attempt at spinning off a division but I understand the rational behind why (in the long run). Short term they are going to hurt, but everything is going to a streaming medium of delivery for on demand media.
The big "if" for me in the equation is if they focus on improving the timeliness of releases and the availability of their streaming selection, then I can see them having long-term staying power. Redbox is killing the DVD by mail market. Anytime you can provide the same service and reduce or eliminate the need for additional overhead by technology is a winning recipe so long as the consumer is equipped to transition.
surprised it took a day for u to bring this up. All I know (or think i know) is they know what they're doing
I'm all in favor of squeezing a nickel 'til boogers bleed out of GW's nose, but this is a tad much. I have a very strong mind to think Netflix is just a case study in complacency. Effectively taking out Blockbuster made them champ and like many who reached the top they never envisioned a different world, in spite of helping to create it. As for simple business economics, you don't shit where you eat. You definitely don't shit in the mouths of those who put food in yours. This is going to get very ugly for them.
Take a look at HP and then get back to me
I don't see why you think it's such a bad move strategically, aside from the poor choice of name.
I know that Netflix wants to basically do away with the DVD-by-mail business and switch to strictly streaming but I'm not sure why they would do it this way. It seems to me that they're either looking to eventually divest this business off so they can get some cash to put towards their streaming business (infrastructure, rights payments, etc), or they are going to just cannibalize this subsidy over time. Either way, by creating two separate entities under one company they are now competing against themselves and are deadlocked to make any improvements to either business. They should have just phased out the DVD-by-mail business within the next few years and make more movies available to stream.
Qwikster is the most retarded name ever. Hastings, you totally suck right now.
I haven't taken a dive into the financials by any stretch of the imagination, and I know that Netflix is the ultimate momentum stock...but does anyone think there could be some value to buying in here?
Again, I haven't done my homework, but blunders aside, it's still an amazing product and an amazing value to the consumer.
Hasting's long-term goal is content delivery over the net, to any device. Unfortunately, the infrastructure is currently not there. Internet enabled TV's are only beginning to gain ground, and Netflix does not have the content library to offer a really competitive streaming service. NetFlix needs to keep the DVD business around because it is a cash-cow, but I think it has a long-term plan of ditching it. Honestly, it 15 years DVD players will absolutely be obsolete, and all content will be delivered online.
The move is a long-term, strategic play. I mean, think about the name of the company. "NetFlix". That name does not really imply DVD by mail, which is responsible for the incredible growth streak the company was on for the last 10 years. Hastings sees where the market is going; its just a tough road to go down. The hardware (television's) need to be upgraded to be internet enabled; content providers need to change their entire business model (which they aren't ready to do); and Netflix needs to convince customers, content creators, and hardware vendors that it adds enough value to be a part of the content delivery process (Content Creation --> NetFlix --> Internet TV --> Consumer).
This market has hugh potential, but tech titans like Google, Microsoft, Apple, Amazon, even facebook, will all want a piece of the TV action. I think NetFlix is making this move just to change the conversation, and get some of the negative press off of them for the price increases and content loss that they were dealt this summer.
Essentially they're starting-up again. The markets not there yet but it is budding. However I do have concerns about the new name. "Quickster" is the last thing a man wants to be nicknamed by his girl. I'll short the stocks just for its bad name.
Part of the problem is that they're completely seperating everything. Someone posted on the Netflix Facebook page yesterday asking if they search for a movie on Qwikster and it's not available BUT it is available on Netflix fro streaming, will it show up or will I have to go and search Netflix.com seperately. Reed Hastings, the CEO of netflix replied with something like "Ouch. Yeah, you'll need to seach Netflix and Qwikster seperately."
Stock's tanking again today, down another $13 (~10%). Ouch.
It's gotta be a BUY sometime soon.
You guys are all looking at this the wrong way. Forgetting the name for a second, splitting the two does make sense. Applying rational thought to this is futile, as Hollywood and Cable TV do not behave rationally.
You have the DVD business which is governed under the First Sale Doctrine. That alone gives the DVD portion significant leverage in how it operates. Netflix can buy, we'll say, 100 Copies of a movie and freely mail it to its customer base in exchange for a set fee. There is no difference between this and going to a brick and mortar Blockbuster Video. They know what the cost of a DVD is, the cost of mail and how much it costs to be profitable as a DVD mailing service. What makes this situation great is that under First Sale, there is a direct limitation as to the nature of copyright protection. Once Netflix's DVD Unit buys the DVD, provided they are mailing out the original DVD they bought, the company is free to do with those DVDs as they want to. It's pretty straight forward. This is how all of the platforms that do DVD by mail operate.
The issue here, however, is the streaming content. Unlike on the DVD side which has a precedent of First Sale, the costs associated with streaming media are entirely different. Instead of paying $20 for a DVD that you can repeatedly mail out and use repeatedly to the point where the cost becomes pennies, you have no ability to fix your costs to that level. The rights associated with Netflix's DVD unit are many and they have a clear grasp on the costs. This is why they were so profitable until they introduced streaming video. With Streaming Video, Netflix's rights are limited and costs are potentially unlimited. The biggest problem is that 99% of the people here are bankers and not Hollywood accountants. When streaming video first started getting licensed by Netflix, they were, as a reasonable assumption, paying a set fee/year for a film library. As the business model developed, Hollywood wanted more and instituted a percentage rake, that is a percentage of the revenue that was brought in. Now, as the growth is pretty significant, Hollywood (much like Cable TV) wants its cake and eat it to. The price increase comes down to the fact that Hollywood wants it's Price/User/Month regardless of whether you use Netflix Streaming or not. Hollywood wants to charge you for the "right" to watch digital content whether you watch it or not. Is that fair to all consumers? Nope. Is that fair to Netflix? Nope, not in the least. The only one here who benefits is Hollywood, much to the detriment of everyone else. Their monolithic mentality is what is causing the split.
Lets take this a step further and look at how Hollywood (and in turn, Cable, Oprah, ESPN, Crapcast and their recent acquisition of NBC, etc.) run their business. First of all, the Cable Industry and Hollywood want their fees. That's a given. What we forget is that Hollywood has a huge war chest at its disposal the likes of which would be be described as what Milken provided to the corporate raiders in the 80s. It is a huge amount of money available to them in order to protect their interests. Unlike what we would think, Hollywood's not going anywhere and isn't under any duress from competition like Netflix. In fact, thanks to Hulu and Boxee, the industry has been working on trying to minimize the damage and maximize their revenue. By being aware of this, Hollywood is more than willing to throw their weight (and war chest) around to get what they want (See Viacom v. Google). But here's the kicker that Hollywood wants to remain a secret. Everyone can talk about this all they want, but as long as there is a revenue stream worth $32 Billion-a-year in affiliate fees (a figure gleaned from a well written article about this discussed in Business Week over a year ago), every decision that Hollywood makes will be to protect that business. For Netflix's streaming business to come in and take down the giant is unheard of when the giant will fight to keep the old way in tact (and can do so with relative ease).
To clarify, Affiliate Fees are revenue sharing agreements. Cable providers pay a portion of the subscriber basis to cover those fees. Whether you watch ESPN or not, if your cable package has ESPN, your cable provider will end up paying $2/Month/Subscriber. Some channels get more per subscriber than others, but that revenue sharing agreement helps generate the constant fees that come from sue. Now the $2/Month/Subscriber for ESPN along with the rest of the $Cost/Month/Subscriber Fees add up and can cost the cable providers serious money. This is why when ABC nee Disney went to war with Cablevision right before the Oscars were to be aired on ABC, both sides would end up screwing the consumer because the fees to have Disney channels (ABC, ESPN, etc.) have now gone up. This partially explains a major motive behind Comcast's acquisition of NBC - it is a hedge and a bargaining chip against every other provider there is because no network will not have NBC on their network.
Lets expand this even further... why the hell would Oprah leave her daytime show after 25 years? Affiliate Fees. Why would she take the paycheck for the show when she could $2/Month/Subscriber from every single cable network by having a 24 hour network? This is Oprah, so that $2/Month/Subscriber figure is not beyond the realm of possibility. Given that she has enough shows in her 25 year run to syndicate, she has the ability to make stars out of people (Dr. Phil, Dr. Oz and Rachel Ray - yes Rachel Ray got her shot at fame from Oprah). Just based on the Oprah Winfrey Show, she has more than 190 days of content for her network. This doesn't include any new content she may develop, new personalities she will launch and having other personalities she created have their on shows on her network. You do the math there. The revenue is astounding!
So why is this imperative to understanding the breakup of Netflix? Cable providers and Hollywood know that internet TV is going to be the way of the future and are positioning themselves to benefit. They know that, through their own partnerships, they can limit who streams what film/tv libraries that are available and renegotiate contracts for existing use content (or for brand new content that has not yet been streamed) at rates favorable to their own needs. They know that this offers a huge benefit to the consumer and can still maintain control by pushing the fee structure to their benefit. The sad part is that the affiliate fees used for regular tv are now going to be applied to "All You Can View" streaming content for providers like Netflix. If Netflix won't play by Hollywood's rules, Netflix's customers lose on the ability to stream. Even Video on Demand, a similar technology, has to pay part of it's "rental fee" to cover the broadcast rights. In the eyes of Hollywood and Cable TV, why should Netflix be different by providing a buffet of content at their expense.
Either you split the company or you screw over everyone. If I don't stream my Netflix account, I'm held for the "right" to stream regardless of whether I do or I don't. That's why everyone is in an uproar. The only way to fix it, regardless of the name, is by splitting the company into two.
It's not the fact that it's splitting it two that's the issue; it's how it was handled is the issue.
That's where you are entirely wrong. The name sucks and the split was handled in a half-assed manor BUT this entire issue wouldn't be happening if they didn't have to split the company in the first place. If not for the decision to split Netflix, we would not be having this discussion. It's not about how poorly the issues were handled (and there have been far worse blunders made than this), but about how and why it came to this. If all you are concerned about is that this was handled poorly, then you are, most likely, one of those people who cannot see the reasoning behind the rate hikes. Everything hinges on the split. As one commentator in the article Eddie linked said:
It doesn't matter how Netflix handles the split, it is still the underlying reason for the split that defines this entire matter.
i just find it funny that I 've been quoting Jason's NFL coaching dad Juan for the last 3 months lol
Other fun PR/ marketing blunders: 1. Chevy Nova - translates literally to "it doesn't go" in spanish, a spectacular failure in Mexico 2. Hits Chocolate - line it up on a shelf and it said hitShitShitShitS 3. Nixon in China - steps off plane and does thumbs up, Chinese for the finger, pisses off 1BB ppl instantly 4. Donald Trump - "I'm running for president, the current guy is an illegal alien....please take me seriously" 5. Charlie Sheen - "I'm in control, I'm in control, I'm in control, bitch I'll cut your head off" 6. Coca Cola - put Saudi Arabian flag on cans, containing religious messages, for sale in Spain.
Here's a top ten list: http://www.digitaldreams.com.ar/english/empresa/marketing_blunders.htm
Way to go NetFlix, thanks for the free entertainment.....your shareholders are going to track you down and pummel you.
They completely fucked up on handling this but they were eventually going to have spin that shit off. Just remarkable how it has been implemented so far.
how much is whitney tilson crying right now
Whitney Tilson must be so pissed. They could have made a fortune off of their short position, maybe not for the right reasons, but still a lot of money.
innovative company + solid long term performance + short term BS = major buying opp
Anyone else seeing an opportunity here?
Netflix still has that whole content problem. A fragmented selection is obviously terrible for consumers but with content being the only real barrier to entry it makes it extremely easy for established content providers to tell Netflix to fuck off. Netflix will have to raise rates again (would not be surprised in the next year) in order to secure content libraries. Once that happens consumers will be forced to make a choice between 1-2 content providers that have their entire catalogs available or a random hodgepodge offering from Netflix. I haven't done any research on preference but I'd imagine the former is much more attractive to most.
This should have been an add on, not a completely seperated product.
I'm guessing that they're intentionally trying to kill off their physical media rental business.
It's going to be funny if this comes back to bite them in the ass when the government continues to chill and let ISPs squeeze them harder with bandwidth caps.
The future is streaming. Brand association is the key, Netflix = Streaming... DVD = Old School, Blockbuster, Limited Growth
Wrong. DVD = Most Widely Accessible Media available. Streaming works when there is enough Broadband Penetration to warrant it being the standard. As long as there is a large percentage of people who do not have broadband access, DVDs will still be the standard. Streaming is a nice feature, but it's not required to do business when more than 20% of the potential subscriber base does not have access to broadband.
Streaming is still a very risky business model in the US. Not only does Netflix have content providers pissed at them but ISPs also. Read:
http://www.worldtvpc.com/blog/netflix-traffic-overtakes-web-surfers/
Any change at the ISP level (which Netflix has absolutely no control over) will severely impact Netflix's business model and based on the extremely negative reaction they had over this QWIKSTER garbage, it doesn't seem like they have very much pricing flexibility. The future is ISPs owning content providers.
Whatwhatwhat, any change on an ISP level will affect anyone... except for maybe Ultraviolet. Remember how I said that the networks like their fees... well this gives the networks their shot at major fee generation!
http://en.wikipedia.org/wiki/UltraViolet_%28system%29
I'd consider it to be a little light reading.
This would be the equivalent of your mobile service provider making you use separate phones for calling, texting, and email/ internet use... The reason people use a cell phone is communication, not for one specific type of communication. The reason people use Netflix is for movies, not for a specific delivery type of those movies. Forcing people to use two separate websites is a huge pain in the ass. Consumers want consolidation and simplicity. This seems completely conter-intuitive.
Netflix is also losing the only switching cost they had going for them moving forward in the streaming business. People liked having the dvd by mail component bundled in the same site. Without that, the only competitive advantage they have is name recognition associated with being a first mover.
I'll believe in effective DRM when I see it. The list of content partners leads me to believe that this might have a chance. Honestly, if the movie industry and TV networks fuck this shit up after having a pretty damn good case study with the music industry then I don't know. All I know is a fragmented system is doomed to fail.
Hulu's offering price just got that much higher?
Yep, I stand by my original HP comment.
http://www.nytimes.com/2011/09/22/business/voting-to-hire-a-chief-witho…
Hiring a CEO without even meeting him, watching your company get dismantled, your jewel of an acquisition get written off, your share price get cut by half, and then attempting to fire him a couple months later for Meg Whitman?
BRILLIANT!
An asset manager in my city said it best: Netflix could have had a business, but they wanted a stock.
Netflix acknowledges the fuck up and dumps the Qwikster name:
http://www.reuters.com/article/2011/10/10/us-netflix-dvd-idUSTRE7992EB2…
In a related story, idiot doper who held the Twitter handle @Qwikster now considering suicide for not accepting the $10,000 some other idiot offered him for the handle.
Down Goes Qwikster (Originally Posted: 10/10/2011)
It is not often that we see a corporate entity bow down to public pressure so quickly. Usually, even in cases of toxic waste spillage, accidental killings and mass fiscal fraud it takes time and lots of public relations maneuvering. Even so, the company in question rarely admits guilt or culpability outright. They sort of bob and weave around the issue until it goes away, while simultaneously greasing a political palm or ten while making some sort of donation to some sort of society.
The results of the Netflix-Qwikster fiasco, however, has been something the likes of which I cannot recall. As discussed by us here, barely a month ago, the outrage apparently ballooned to such proportions that Qwikster is a memory before it ever got off the ground. Being one of the people who questioned the split in the first place, I cannot really complain about the outcome. That having been said, I feel like the general trend towards not wanting to take responsibility for your actions is the real epidemic in the America of today. Netflix had its very sound and reasonable reasons for splitting their instant view and home delivery services. These plans may not have been popular or perhaps even profitable down the line. But does that even matter? Is showing the public that you do not have the stones to stick by your decision really the way to run a company in unpredictable markets?
I have to say that for once I am entirely unsure of where to stand. It is really easy to throw stones at the glass house, but executive decision making is the hardest job out there. I recall some of the hard and unpopular decisions I had to make in my own business endeavors and I never had to answer to a multi- million person customer base. It is absolutely nerve racking and I don't think that a lot of people realize just how so. This is why I have to empathize with Reed Hastings. It truly is hard out there for a pimp these days. Every asshole has an opinion and there are more buttholes than brains. Oh yeah...and everybody is always butthurt about something.
What do you guys think of the Netflix decision? Obviously, whether we are investment bankers or pastry bakers, we need to satisfy our customers. That said, how smart is it to run your business by allowing popular and unpopular sentiments to rule the day? Is consistency and steadfastness the proper route? Or is Hastings' flip flop really a intelligent and humble decision of a far sighted leader?
I really don't know. I do know that I am worried by the increasing trend of whining and complaining getting results in an environment where logical and patient intellectual discourse is not only discouraged, but seemingly... disallowed.
There have been plenty of instances where executive decisions have been made that seemingly made a ton of sense at the time, but the negative results among the customer base were impossible to predict. Look at Coke 1.5, the new Tropicana logo failure, and others. It's not really flip-flopping if all your customers hate it and you admit you screwed up. What other choice did they have?
And I agree 100% that we are a "blame everyone else first" society. It's disheartening, really.
The companies that you are referring to, massive oil and banking conglomerates like BP, Exxon, Goldman etc., are essentially global economic infrastructure. It's impossible for their "customers" (read: subjects) to take their business elsewhere. Netflix battles in a HIGHLY competitive industry and must supply the demands of its customers.
Attempting to compare the two only serves to highlight your weak writing abilities and faulty logic.
And yeah "blame everyone else first" is going to be the undoing of America sadly.
I can understand what they were doing with splitting off the physical DVD rental portion of the business but forcing people to create seperate accounts, have seperate billing, and not including Qwikster results in Netflix searches and vice versa was a horrible idea and I'm not surprised they reversed the decision.
Netflix should have charged for streaming when they first started. Sure having streaming included with the monthly rental fee helped them grow a lot faster but it also painted them into corner. No one is going to start paying for a service that they were getting with out any additional charge previously.
'Qwickster'. ;)
So why is the stock down 5% today?
I agree with AstonMartin... and what are your projections? I regret to admit I went long(now doesn't seem that clever idea), do you think it will pick up, or I should GTFO urgently?
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