Reed Hastings Responds

This past Sunday, I penned an open letter to Reed Hastings, CEO of Netflix (Nasdaq: NFLX  ) . Writing with my tongue somewhat in cheek, I intended to capture the frustration some people felt, while keeping an even-tempered perspective on what this means for long-term subscribers and investors. But I never actually expected I'd get a reply.

A surprise response
Just before I went to bed Sunday night, an email arrived from Hastings himself, categorically addressing my concerns.

Taken on a larger level -- as a message to all of the subscribers who have been irked by the rate hike -- I think its contents are worth sharing here:

  • Hastings started with an apology: I'm sorry you felt jammed by our message. 
  • He then responded to my plea to have the rate hike explained: We will take the increased revenue and mostly spend it on more streaming content ... we want to be able to have stronger and stronger streaming.
  • And he concluded by making a fair assessment of what Netflix has to offer right now: It is a big increase, I know, but we feel each of the $7.99 programs are a great deal on their own.

What this means
If you read my previous article, you know that I wasn't suggesting selling my shares or cancelling my subscription. Basically, I just felt a little cold, based on how the rate hike was carried out. This response pretty well addresses my concerns.

In some ways, we've been spoiled with an $8.99 plan that sent us DVDs and allowed us unlimited streaming. That model probably isn't sustainable.

Moving forward, I'm fairly certain that Netflix would eventually be willing to sacrifice its DVD business to the likes of Coinstar's (Nasdaq: CSTR  ) Redbox. I don't doubt that most of us will be using streaming to watch our movies 10 years from now.

If Netflix still wants to be atop the entertainment mountain by then, it'll have to beat out the likes of Apple (Nasdaq: AAPL  ) , Google (Nasdaq: GOOG  ) , and Amazon.com (Nasdaq: AMZN  ) . In addition, it'll have to make smart deals with content providers such as Liberty Starz (Nasdaq: LSTZA  ) , Disney (NYSE: DIS  ) , and even much-maligned News Corp.'s 20th Century Fox division.

I don't know how that will all play out. Anyone who tells you they do is probably leading you on. But I'm happy camping my investment dollars where they've always been, and betting that Reed Hastings knows what he's doing.

If you're looking to stay up-to-date on all things Netflix, add the company to our free My Watchlist service today:

The Motley Fool owns shares of Apple and Google. Motley Fool newsletter serviceshave recommended buying shares of Netflix, Walt Disney, Coinstar, Google, Amazon.com, and Apple; buying puts in Netflix; and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Brian Stoffel appreciates the time Hastings took in responding to his letter. He owns shares of Apple, Google, Amazon, and Netflix. 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.


Read/Post Comments (26) | Recommend This Article (60)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 19, 2011, at 12:50 PM, LyfordJr wrote:

    I've been a Netflix subscriber for years and years now, and, since we get three out at a time, our monthly increase is pretty small. We do watch a lot of stuff on streaming now, but as long as there are items, typically older that aren't going to be available at a RedBox, that aren't available for streaming, there had better be a DVD component. It's the availability of EVERYTHING that's available that makes Netflix such a great service. Take that away, and it becomes far less appealing...

  • Report this Comment On July 19, 2011, at 1:29 PM, hwy61 wrote:

    I agree that $7.99 is a great price to pay for each one of the programs. I cut back to the one-disc-at-a-time plan when I got cable last year, but do not use the streaming option enough to make it worth paying for both. So I'll gladly take a lower bill and continue my one disc plan.

  • Report this Comment On July 19, 2011, at 1:44 PM, artbcpa wrote:

    While I agree that the way in which Netflix made their announcement was a big issue, I am also concerned that the size of the price increase and Reed Hasting's response confirms what the "bears" have been saying all along about Netflix's future problems. Their MAIN ISSUE has been the cost of obtaining streaming content. While I don't necessarily agree with their final analysis, (that it precludes Netflix from being profitable in the future), I think it does indicate that the future is much more uncertain then I originally had thought.

    FULL DISCLOSURE: I have been a stockholder of Netflix for nearly two years.

    I have consistently discounted all of the negative "talk" because I believe that the real future profitability of Netflix is tied to overseas growth, not the USA. So I believe that the Latin American announcement just before the price increase was another brilliant move by Reed Hastings et al. However the overseas addition to profits may not take place for several years. With the price increase I am concerned that the growth and profitability in the USA may significantly slow several quarters before the overseas pickup.

    So I reevaluated my position as a user and as a stockholder. As a user, I decided to keep the streaming for the "old" content which I love (I am currently watching the entire West Wing series)...and drop my DVD subscription and purchase them one at a time through Redbox (Coinstar - CSTR). As an investor, I reduced my holdings in Netflix and purchased Coinstar with the proceeds.

    That's my opinion.

  • Report this Comment On July 19, 2011, at 1:47 PM, AE1M wrote:

    My big problem is the lack of good movies on the streaming content. Almost every time I try to find a movie, it isnt available streaming, even older ones.

    Bob

  • Report this Comment On July 19, 2011, at 1:54 PM, rightsaidfred wrote:

    Can you publish the full contents of Reed's response?

  • Report this Comment On July 19, 2011, at 2:35 PM, MKArch wrote:

    Who said this move was going to result in increased revenues? Besides an increase in NFLX already massive 50% churn rate subs opting to move to one service will generate 20% less revenue. Then again based on the dog and pony show scripted cc's that Reed Hysterically tries to pass off as "live" I can understand him framing opinion that this is going to result in increased revenues (until results prove otherwise).

    It's also hysterical that he keeps trying to insist that increased revenues are resulting in increased content. They have been losing content and more and more being relegated to tv re-runs. Their content is being priced on numbers of subs and the latest move is intended to move subs who prefer dvd's off of streaming in order to get that cost down. They probably also figured any subs who walk altogether were going to do so soon anyway so it's not a huge loss. In the end they. In the end this move is about content cost control not about increased revenues. They are starting to recognize the fact that a $8.00/ month all you can eat subscription streaming service is not sustainable. First comes weeding out low usage subs. next will be tiered service where subs who want something besides re-runs and old movies will have to pay up on par with what cable charges. Bookmark this post it's coming soon.

  • Report this Comment On July 19, 2011, at 2:43 PM, MKArch wrote:

    I should also note that as time goes on the subs who don't want to shell out more than $8.00/ month and don't like the dvd service are going to figure out that the company that provides their broadband/ tv services (required to stream NFLX) is giving the same content away in their tv everywhere service. Why pay $8.00/ month when you get it for free already?

  • Report this Comment On July 19, 2011, at 4:09 PM, Metrobank wrote:

    Not buying his babble at all. Mr. Hastings is running a dangerous game, He is messing with his core subscribers by splitting the service offerings in two. He will lose a lot of subscribers by doing that as people find cheaper alternatives. I am looking into blockbuster's service offerings.

    I am a current customer of Netflix but I can tell you the content on the streaming side "ain't so hot". In fact, you can't find a lot you want to watch on streaming. I have already cut my bill from $34 per month to $11.00 and will consider quiting NFLX altogether once the new plan comes in.

    My guess is that Mr. Hastings knows that the Q2 results will be less than stellar and is throwing a bunch of carrots out there to blunt the results. So, they change the pricing plus talk about expansion to other markets. We all know expansion will chew up dollars and increase costs. Good luck trying to get them to be straight with investors over how they are doing in those markets.

  • Report this Comment On July 19, 2011, at 4:18 PM, TheeShawn wrote:

    What I want to know is, how do internet providers allow Netflix or anyone for that matter, to stream over their lines for free?

    At what point do internet providers start charging by the stream much like the post office charges by the letter to get your content from one place to the next?

    If I were the internet providers, I'd certainly consider what Netflix does as something I should get a cut of considering they use my lines/access for their business to function.

    I cancelled my netflix account on principal, not cost. They increased pricing by 80% in the last year with zero increase in value. They went from a company who did things differently to one that operates like the rest of them once they get to a certain size, squeeze the customer until it hurts while telling them it's for their own good.

    Maybe some day I'll be back if their content supports the price, but maybe not, others are starting to provide streamed on demand content and only more will in the future. Netflix isn't going to be the only player in town. It will become commoditized like many things, which will lead to reduced profits per subscriber for all concerned.

  • Report this Comment On July 19, 2011, at 5:21 PM, Quick2learn wrote:

    I too will be dropping my Netflix account before the Sept 1 increase an over 40% increase for nothing new in the stream is ludicris. My cable company offers old movies too, and Netflix has to wait 30 days after a movie is released to the public, who makes such deals? So, off with their heads as the Queen says, and lets move onto other suppliers. That $287/share stock price is whacked out of sorts as well.

    Disclosure: I do not own Netflix

  • Report this Comment On July 19, 2011, at 5:46 PM, xetn wrote:

    Does anyone believe that this tactic would have been possible before Netflix was able to gut Blockbuster?

    (I am not saying I believe they did anything wrong; as a matter of fact they just out-competed Blockbuster).

  • Report this Comment On July 19, 2011, at 5:50 PM, ejclason2 wrote:

    Streaming may be the future, but when I decide what services to subscribe to today, I care about what is available today. And today there is an order of magnitude more content available on DVDs than streaming. So if I had to choose, I would choose DVDs. But I know streaming is the future, so I want my have my cake and eat it too.

    If Netflix had offered a discount for those that want both DVDs and streaming, I would have done that. After all, a 2 DVD subscription doesn't cost twice a 1 DVD subscription. Since a bundling discount was not offered, I have canceled my Netflix subscription.

    If in the future, if Netflix's streaming content approaches available DVD content, I may re-subscribe, depending on circumstances. In the meantime, Netflix will have to make do without my subscription. It's not my responsiblity to fund Netflix's future.

  • Report this Comment On July 19, 2011, at 6:13 PM, dunringill wrote:

    I'd like to see them add the ability to pick the unlimited streaming with one at a time 2 a month DVDs by mail. that would $13, and as more streaming content is added, gives a way to get those one or 2 DVDs you can't stream without a huge cost increase.

  • Report this Comment On July 19, 2011, at 7:47 PM, azmfool wrote:

    @Brian - I sure would have liked to see the entire response carried in your article.

    Generally speaking, the manner in which you present the message is every bit as important as the message. Two months ago I was preaching to others at the construction company where we work how often we can avoid problems by communicating (read: carefully explaining) ahead of time with people who are impacted by our work. It's never about asking for permission - it's about letting them know what we are doing, why we must do it, and how we believe it will impact them.

    Netflix is an awesome company, but in execution, this was not exactly a smooth move. You never want to give the appearance of declaring war on your customers.

  • Report this Comment On July 19, 2011, at 9:39 PM, do9432 wrote:

    I have only one problem with the Netflix changes. Where I live, there are only two Internet Service Providers that serve the residential market.

    (1) Comcast . . which manages to get away with abusing both their customers and employees & has a 250 gb limit per month.

    (2) AT&T who recently imposed a 150 gb limit which I suspect is an attempt to coheres their customers to subscribe to their gawd awful Uverse service at the expense of Netflix subscribers.

    Personally, I have decided to dump both of them clowns and go with Covad which primarily provides ISP services to small businesses. It costs a little more, but you get 5 fixed addresses, no caps, & no games.!!!

  • Report this Comment On July 20, 2011, at 1:29 AM, Netteligent09 wrote:

    We cancelled Netflix. Do not bite the hands that feeding you. Greed corporate never changes.

  • Report this Comment On July 20, 2011, at 10:48 AM, Budrog wrote:

    I have been a loyal Netflix customer for 8 years and my loyalty won me a %60 increase in price just like any new subscriber. Does this mean that I think Netflix should not make changes for its future profitable s? No, I would want Netflix to be a strong competitor both now and in the future but a %60 increase is too much. I do think that Netflix needs to increase their fees but they should give their loyal customers some consideration.

    The Netflix increase follows recent changes made by Internet Service Providers (ISPs). Two months ago my Cable ISP hit me with their data cap limit. To keep Internet access so I could use services like Netflix, I had to get a business internet account for $40 more a month. I refused to let my ISP stop me from using Netflix, a competitor of theirs but now I plan to drop Netflix services completely and use competing services. I plan to switch to the Amazon Prime service as a replacement for the Netflix Video streaming service. Despite complaints about Netflix’s streaming library, it is still the largest out there as far as I can tell but Amazon’s streaming video service is new and its streaming library already beats most others except for Hulu Plus but I don’t want to pay for Hulu Plus and watch commercials.

    Everyone needs to make their own choices as to how they want to be treated as a customer. I have made my choice.

  • Report this Comment On July 20, 2011, at 12:49 PM, caltex1nomad wrote:

    I will be dropping down to Streaming only for now. I understand the reason for the rate hike. Most of what I watch is on Streaming (Older Movies and TV Shows). I'm discovering lots of great stuff I've never seen before and it beats the heck out of some of the crap that's produced today. DVD will be dead in a few years anyway, Netflix is just nailing the coffin shut a little early.Stream On..............

  • Report this Comment On July 20, 2011, at 1:06 PM, TMFCheesehead wrote:

    Fellow Fools,

    As I think the letter is pretty benign, here's what Mr. Hastings sent to me:

    --------------------------------------------------------

    I’m sorry you felt jammed by our message. We will take the increased revenue and mostly spend it on more streaming content. It is a big increase I know, but we feel each of the $7.99 programs are a great deal on their own, and we want to be able to have stronger and stronger streaming.

    Best,

    -Reed

    CEO Netflix

  • Report this Comment On July 22, 2011, at 1:33 PM, robbglass wrote:

    Reed H.'s very concise reply to Brian's open letter very plainly declares his intentions.

    Brian's playfully snarky yet informative reply shows the best of "amuse, enrich, and educate".

    Rob Glass

    Long INFN

  • Report this Comment On July 22, 2011, at 3:55 PM, hrse wrote:

    @TheeShawn

    NetFlix does not streem over the internet for free.

    They pay to connect just like any other content provider.

    Although the local internet providers are not getting anything extra from Netflix, the local providers are getting paid by their subscribers like you and me.

  • Report this Comment On July 22, 2011, at 6:37 PM, BigMoonDog wrote:

    I was miffed after receiving Netflix's rate hike message, and my response was to cancel my Netflix membership.

    As an Amazon Prime member, I'll use that service for my video content streaming. As for DVDs, I subscribed to Blockbuster's mail delivery service. I have a Blockbuster store near my house, so I am able to trade in mailed DVDs there without any additional cost - pretty cool.

    I had been a Netflix subscriber since 2007, and prior to the rate hike, I had no plans on cancelling my service- they had me for life, but now have driven me to the competition . We'll see how the rate hike works out for them. I may come back n the future if the streaming content becomes better.

  • Report this Comment On July 22, 2011, at 11:58 PM, pillok wrote:

    Maybe a Netflix customer is not supposed to admit this, and don't want to sound like a shill, but I thought the old price was cheap. Basically, I always felt like I was paying a subscription for the disks, and getting the streaming for free. But all the while the streaming has become the service I use while the disks sit on the coffee table for weeks. I'm not happy about the price increase, but also can't imagine I am the only one who will adopt this strategy - pay the $15 for a while (a year?) until the streaming content catches up, then drop the disk option. Which is probably exactly what Reed Hastings wants me to do; his only challenge will be to make sure no plausible alternative creeps up.

  • Report this Comment On July 25, 2011, at 11:12 AM, JoeandChuckP wrote:

    1. I don't think this as an apology - it was a qualified statement that does not acknowledge the bad feeling. It doesn't say we're sorry we made you feel this way.

    2. I'm on the fence of keeping the streaming. We may not.

    3. Wish I would have bought the stock regardless.

    CP

  • Report this Comment On July 25, 2011, at 11:50 AM, mjg6233 wrote:

    When Netflix informed the public of the price hike, I investigated new programs available from my TV carrier Dish Network. Turns out they have 2 all HD program choices with no SD broadcasts. I have been unhappy paying for SD broadcasts that I haven't watched for 1 1/2 years. I lowered the price of satellite by $20/month and I will just absorb the increased priced Netflix package.

  • Report this Comment On July 27, 2011, at 4:40 PM, dmpilot wrote:

    I'll be very happy if a lot more content is made available streaming. The only reason I kept my one disc out at a time was that the new releases weren't available streaming.

    I guess I'll sit back and see what unveils.

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