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In a late-night email that reminded me of the sort I used to get from an ex-boyfriend who felt he hadn't had his say, Netflix (Nasdaq: NFLX  ) CEO Reed Hastings announced the spinoff of the DVD business from the "rest" of Netflix, and its new name, Qwikster.

Part "I'm sorry," part "I'll change," and part "Don't leave me," the email was the kind that only a desperate man sends. And the apparent overnight creation, rebrand, and launch of one of its key business components is the sort of move that only a truly desperate company makes. But with the stock price down 50% from July, is now a good time to buy?

I'm sorry
In July, Netflix announced a fare split and increase for its two lines of business -- the DVD-mailer service and the online streaming. Customers revolted, not only because the increase was almost 50%, or because it was the second increase in nine months. Many customers thought Netflix's attitude was poor and the announcement arrogant, and the warm fuzzies they'd carried for the Red Envelope disintegrated faster than you can say "drunken dial." Hastings' email this week carried an apology for the way the increase was announced, but not for the change itself.

I'll change
In the apologetic email, Hastings announced that Netflix's traditional DVD business will be split from the streaming not just in price plans, but also spun off into a new business model called Qwikster. The DVD-only Qwikster will have a separate website, with separate account information, ratings, and recommendations. Hastings was quick to assure customers that the envelope would still be red, and although he doesn't like the new logo, he's sure it will grow on him over time.

Don't leave me
Netflix's stock has been in a nosedive since last week, when the company announced that it expected to lose 1 million subscribers -- 600,000 current and 400,000 potential.  On July 13, the day the price increase was announced, the stock was trading at $298.73. Now it's less than half that. It may have been a shock to company executives, but not to customers who were noticing a slew of other changes -- less responsiveness over unplayable discs, streaming that took longer to present a clear picture, and emails that seemed less personal and more corporate in nature. Except, of course, for that last really awkward one.

Wait, who's that guy?
Perhaps there's no better proof that the Qwikster announcement was a last-ditch, out-drinking-with-the-guys brainstorm than the series of glaring oversights that accompanied it. The website hasn't been built, the Twitter handle belongs to someone whose profile photo until several days after the announcement was a pot-smoking Elmo, and Facebook lists two people with Qwikster as a last name but no fan page. There is, however, a Wikipedia page, even if it looks like the kind I might make for myself but pretend someone else did.

What we have here is a failure to communicate
Most savvy customers understand that the price of commercial-free streaming is going to go up. However, when Netflix announced that it was nearly doubling prices a mere nine months after a more manageable price increase, it did so arrogantly, with a take-it-or-leave-it attitude.

Netflix was adored when it was the scrappy upstart taking down Blockbuster, which had already killed its own goodwill through excessive late fees and poor service. But when it became the conglomerate, when its customers started to feel as though they were numbers on a spreadsheet, they took off for greener pastures. And if last week's email was any indication, Hastings still hasn't learned the lesson that a conversation in the beginning will prevent a fight at the end.

Plenty of fish
Shortly after Netflix's news broke, Blockbuster -- now owned by DISH Network (Nasdaq: DISH  ) -- tweeted: "Dear Netflix, we’re offering special prices & 30-day trials of Blockbuster Total Access to your members #helloBlockbuster."

Other competitors aren't being so gleeful about Netflix's folly but stand to gain just the same. Wal-Mart's (NYSE: WMT  ) Vudu offers streaming rentals charged per movie.'s (Nasdaq: AMZN  ) Prime currently offers streaming video as a benefit of its annual-fee shipping club, but look for that to change as Amazon adds to its streaming library. And let's not forget my personal favorite; Hulu, owned by Comcast's (Nasdaq: CMCSA  ) NBC, News Corp.'s (Nasdaq: NWS  ) Fox channel, and Walt Disney (NYSE: DIS  ) , with free and subscriber-only content. Hulu could go either the IPO route or the buyout track in the coming year, so keep an eye on it.

Where we go from here
There's some buzz around Fool HQ that Hastings is too smart to make a dumb move like this unless something's coming, and quick. Whether it's the acquisition of a gaming company, a slew of new streaming content rights, or the ability to suddenly play movies straight on our frontal lobes by tugging an ear, Netflix needs to provide its remaining customers (and investors) with a win, and soon. That's the only way the company can truly rebound.

Until then, some of the Fool writers are taking bets on how low the stock will go, and Netflix has crushed even the most pessimistic amount. I'm so convinced that Netflix is going to underperform its competitors in the next five years that I'm going to give it a thumbs-down rating in Motley Fool CAPS

But if Hastings sends another email, all bets are off.

Wondering which one company will profit the most from the broadband Internet expansion? Check out The Motley Fool's Top Stock for 2011. Enjoy a copy on us; it's free for Fools.

Fool contributor Molly McCluskey no longer receives late-night e-mails from her exes, but they follow her on Twitter at @mollyemccluskey and you can, too. She doesn't own stock of any of the companies mentioned. The Motley Fool owns shares of Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of Walt Disney, Netflix,, and Wal-Mart Stores, creating a bear put spread position in Netflix, and creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 (4) | Recommend This Article (4)

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 September 27, 2011, at 1:23 AM, balaray wrote:

    A lot of folks are giving Hastings tremendous amount of credit and that somehow NFLX is infallible. The reality is Netflix does not own the content or the pipe - where is the moat? Ultimate winners in the streaming battle will be the content owners and/or the pipe owners (AT&T, verizon etc)

    The share of the pie for Amazon, Netflix and all other wannabes including Dish/BBI will be quite small.

    NFLX has a moat on the DVD distribution business. While I agree that the business model is being overtaken by streaming, that is still a long way off and Netflix is hurting itself by killing the one aspect of its business model that gives it a differentiated value proposition to the customer that cannot be easily replicated by the competition (moat in 40+ DCs around the country)

    Yes, the operating margins for the DVD distribution business are razor thin but the valuation for the business should be done in terms of the combined value prop to the customer.

    Anyway, I have never thought of NFLX as a good investment and I do not see anything now that will help me change my mind.

  • Report this Comment On September 27, 2011, at 1:01 PM, blake2145 wrote:

    Check out this video showing how the Netflix heads think up their business-ruining stupid ideas:

  • Report this Comment On September 27, 2011, at 6:05 PM, XMFAlaska wrote:

    Hi Blake2145, love love love the video. Just sent it to a bunch of Fools with quirky senses of humor (which is most of us, really.) Thanks for sharing.

    Balaray, thanks for your insight. I agree with you that content owners are taking the reins now, and it will change how the streaming business operates.

  • Report this Comment On September 28, 2011, at 11:52 AM, grouchorcine wrote:

    Great, thanx for nothing everyone . kickem when they are down. After thought is easy where was The advice to sell before the big loss.

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