Thursday, September 22, 2011

Culture Shock 09.22.11: Can Netflix survive long enough for its master plan?

Netflix has had a bad couple of months.

Since the company announced its new price structure, which took effect this month and amounted to an increase for most subscribers, Netflix has been dealing with one PR disaster after another.

The rate hike was followed by Netflix's failure to renew its streaming deal with Starz, meaning lots of on-demand movies — including Disney films — will disappear from Netflix's offerings at the end of February.

As a consequence, the past two months have been ugly. Netflix has shed roughly 600,000 customers, while its stock has lost about half its value.

The backlash's severity caught Netflix's top brass off guard — and me, too, for that matter. I figured most Netflix users would complain and then suck it up, deciding Netflix was still worth the money. As it happens, most did. But, still, more than half a million customers actually following through on threats to dump Netflix. I don't think anybody expected that. It runs counter to the entire 20-year history of Internet griping, which had never amounted to anything.

Until now.

Netflix CEO Reed Hastings tried to stop the hemorrhaging this week in an emailed apology that doubled as an announcement for Netflix's next move, spinning off its DVD-by-mail business into a separate company to be called Qwikster, while Netflix continues to offer streaming video.

Cue yet another round of angry customers and widespread ridicule.

Adding the cherry to this self-inflicted pie to the face, the newly valuable @Qwikster Twitter ID is already spoken for, and the guy who speaks for it does so only in a vague approximation of a language, presumably meant to be English.

From a PR standpoint, you couldn't ask for much worse, which is why it's ironic that from a pure nuts-and-bolts business perspective, everything Netflix has done makes sense — in the long run.

In the long run, DVDs are a dying format, destined to appeal only to collectors, aficionados and aging hipsters the way laserdiscs and vinyl albums do now. Nobody is going to make bank renting discs by mail. Even the Postal Service can't make money on mail.

Anyway, Netflix would rather spend money on content than on postage.

But, knowing that, all of the Hollywood studios have started upping their demands, which is what forced Netflix's rate hike and restructuring. Movies and TV shows don't come cheap.

The long-run plan is sound, but in the short run, Netflix has all of the dead-eye aim of an Imperial Stormtrooper.

Still, how bad are things for Netflix, really?

Despite losing half of its market value, Netflix's stock is still in the neighborhood of $130 a share, which is about $100 a share more than where media giants Disney and Time Warner currently trade.

Netflix also still has 24 million subscribers in the United States alone, which is more than either Showtime or Starz, and not far behind HBO's roughly 28 million. And Netflix has yet to roll out its own original programing.

The biggest threat to Netflix is still that someone might beat it at its own game. Blockbuster's new owner, Dish Network, might turn that floundering brand around, or a new owner might try to make Hulu competitive — something Hulu's current owners seem to discourage, with the exception of offering Criterion Collection films to Hulu Plus subscribers.

But first things first. Netflix really needs to buy that @Qwikster Twitter account.

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