‘Apocalypse Now’ for Netflix

RESTON, Va., October 25, 2011 – As we recently related in this space, Netflix, the movie rental company that once could do no wrong, began to implode this summer. First, its heretofore revered CEO, Reed “Hasty” Hastings abruptly and unceremoniously announced that it was effectively doubling the price of its stream-or-rent-movies-for-under-$10 model. Customers reviled Hastings and his company and began to bail on the service en masse.

But wait. There’s more.

Having alienated his legion of customers with his initial bombshell, Hastings dropped another Daisy Cutter: “Guess what, saps? We’re unbundling the services now, renaming our original DVD rental business “Qwikster,” and forcing you to deal with different websites and accounts if you still want our dual delivery service. Have a nice day.”

Irate customers qwickly re-doubled their efforts to stream out the exit doors, for indeed, someone—namely Netflix CEO Reed Hastings—had yelled “Fire!” in his company’s crowded theater with predictable results.

Since that second disastrous announcement, Netflix tried to cut its losses, qwickly quitting Qwikster and emailing soothing mea culpas under Hastings’ signature. Unfortunately for the company, this latest soft-shoe routine has done little to staunch Netflix’ massive customer stampede.

The solid proof of this came yesterday when the company reported dismal earnings and the likelihood of still more dismal earnings for the indefinite future. There was a little good news in the company’s report. When you commit serial ineptitude, you pay a price.

Netflix is supposedly on track to expand to the UK and Ireland in the near future. But that has done little to assuage investors concerned about Netflix’ dwindling bottom line amidst the backdrop of an economy and an industry that’s not doing too well these days either. (How’s that hopey-changey stuff workin’ out for ya?)

When the company announced its earnings after market close yesterday, the stock (NTFLX) tanked in after-hours trading, and continued to plummet after this morning’s opening, clocking in at $75 and change for a one-day cascade of some 37%. Netflix’ stock had closed at its all-time high of $298.73 just this past July. How the mighty have fallen.

Netflix is at the core of a rental-entertainment firestorm. The movie and TV industries’ profit models are in chaos these days and no one is really sure how to move forward since the Netflix model (and Apple’s iTunes model as well) has been highly disruptive to these industries’ profit models, lowering both the costs and the profitability of spinning off celluloid products into other packaging and price points.

Netflix itself, having essentially invented first the DVD-by-mail models and then creating downloadable streaming video versions on demand, started these disruptions in the video cosmos. But predictably, price competition arose, with the once nearly-dead Blockbuster franchise finding new owners and with mighty Amazon entering the lists, throwing in a new free streaming service for its best customers.

Hastings was no doubt trying to get ahead of the economic curve, seeking with both the rate-hikes and entity-splitting to preserve his company’s profitability even as video product purveyors were refusing to cut better deals and withdrawing product. But Hastings’ hastiness has reaped a whirlwind.

In yesterday’s quarterly earnings report, Netflix disclosed it lost some 800,000 subscribers in the U.S. in its third quarter and predicted the cancellations would continue. As CNBC’s Herb Greenberg noted, Hastings ultimately “fell into the classic trap of believing his own press clippings. Hastings admitted as much in September when he told subscribers, ‘I slid into arrogance based upon past success.’” Hastings has argued that the DVD-by-mail rental business is a dying model, soon to be if not already replaced by the streaming model. But his own streaming product argues against such a hasty move like the one he recently rescinded. And his dwindling customer base looks like it’s having the final say.

In a word, Netflix’ current on-demand streaming library is almost uniformly dismal, consisting primarily of old Nat Geo and PBS retread programs (30-year old Masterpiece Theatre reruns, anyone?) and vintage films no one under 40 has ever heard of.

To obtain better and more recent films, it’s almost mandatory that Netflix customers maintain their DVD-by-mail subscriptions. And if they don’t want to deal with Netflix’ price increase for the dual model, they’re either likely to drop the relatively worthless streaming service in favor of the DVDs or look elsewhere for these services. Blockbuster is evolving its own alternatives along with Amazon.

Meanwhile, this writer can’t imagine that Steve Jobs didn’t leave a final legacy behind with Apple—some flavor of “iTV” with an all-in-one device/service that will obliterate the competition in a final Texas cage match round of harmonic convergence. Umm, stay tuned.