Why Reed Hastings Doesn't Get It

Netflix (Nasdaq: NFLX  ) stock rose nearly 7% after the company announced that it won't be splitting apart its DVD and streaming services after all. But before you get too excited, here's why abandoning Qwikster is another bad sign for investors.

It wasn't about Elmo
Critics, including myself, were quick to point out that the Twitter handle for "Qwikster" belonged to a young man who tweeted about sex and drugs and whose profile picture was the lovable Sesame Street character smoking a joint. The pot-smoking Elmo became a mascot of sorts for everything that was wrong with the Netflix/Qwikster split and was ultimately an embarrassment.

But Elmo is a red herring. The real problem lies in how the plan got as far as it did.

No one's stopping the bad ideas from happening
The decision to not split off the two sites was the right one, but the Qwikster debacle brought to light some very disturbing structural issues within the Netflix foundation.

Picture for a minute the conference table around which these decisions are being made. Imagine someone has said: "We should increase rates, split off our services, and require two logins and accounts. Don't worry. It'll be easy, and customers will love it."

When I try to imagine what happens next, I hear only crickets. Because clearly, no one spoke up, or if someone did, he or she was overruled. This leads me to believe one of two things is happening at Netflix. The first option: CEO Reed Hastings is making these decisions by himself, and he's not listening to his staff. The second: There's a team of people making bad decisions collectively.

Both prospects are rather frightening.

No beta
Netflix could have rolled out Qwikster to a trial group on a six-month basis. Internally, the six months could have been used to test out the name, secure necessary rights to social-media handles, and work out logistical kinks. At a minimum, Netflix could have sent an email survey to all members asking, "Hey, how do you feel about this?"

When quitting Netflix, I was given a series of questions to fill out. They included -- and I'm paraphrasing -- lack of time for television, going to a competitor, and so on. Netflix didn't ask whether I was leaving because of the price increase, or because I didn't want to create a separate account on Qwikster. That's like having exit interviewers standing outside voting booths and asking, "Do you prefer a Hershey bar or a Tootsie Roll?"

Let's talk. Or not.
In the midst of all the fallout over the price increase and split, Netflix posted an ad for a " Consumer Media Relations PR Manager." Among the qualifications: Be an adult. The ideal candidate is "a mature, fully formed adult with a happy, well balanced life" and "motivated by what is best for Netflix." As someone with a graduate degree in corporate and public communications, I feel it necessary to tell you that if your company is in the midst of a communications crisis, you don't post an ad on Craigslist saying you need to hire a grownup to handle your PR.

Netflix's competitors aren't squeaky-clean, of course. Amazon.com's (Nasdaq: AMZN  ) gotten in trouble for paid reviews on its website. Before it declared bankruptcy and was subsequently purchased by DISH Network (Nasdaq: DISH), Blockbuster faced lawsuits over its late-fee policy. Comcast (Nasdaq: CMCSK) was publicly derided for cronyism after hiring the FCC commissioner who voted in favor of the company's acquisition of NBC. But when you're Netflix and you have only one product, splitting it, increasing rates, and spinning it off in a matter of months tends to have a pretty big impact.

The Foolish bottom line
It would be a mistake for Fools to think the worst is behind Netflix. The company will be fine … until the next technology, the next competitor, the next public-relations disaster. The Qwikster fiasco shows that Netflix simply doesn't understand its own business. And although Netflix may regain some of its market share, the days of a $300 share price are long gone. 

Am I wrong? Are you sticking with Netflix? Let me know below.

Fool contributor Molly McCluskey owns no shares in any of the company mentioned. Motley Fool newsletter services have recommended buying shares of Netflix and Amazon.com and creating a bear put spread position in Netflix. 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 (10) | Recommend This Article (12)

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 October 11, 2011, at 9:34 PM, MINNION wrote:

    From the looks of things Reed Hastings is running this gig by himself. Living up to his name he Hastily makes Reediculos decisions. I agree with you that the company is going to be around a little longer (hopefully). The stock is going lower still.

    I cancelled my subscription.

  • Report this Comment On October 12, 2011, at 12:50 AM, EMFreak wrote:

    Hit the nail on the head.

  • Report this Comment On October 12, 2011, at 5:07 AM, azspartan wrote:

    You're right on. After being a very happy Netflix customer for years, and enjoying the streaming video as a nice suppliment to the DVD service, I finally canceled my subscription yesterday. I now stop at one of the 6 Redbox machines on my way home from work and rent Blu-Ray movies for only $1.50 each. Coinstar is going to be a big winner as a result of this Netflix blunder.

  • Report this Comment On October 12, 2011, at 9:40 AM, cattywampus wrote:

    I used to frequent Redbox, until they changed their web-site and it was like the days of dial-up. I tried to write them an e-mail and it wouldn't go through. Someone left the front door open and the kids, the cats, the birds and bugs are all coming and going willy-nilly. I think the cable operators slipped something into their water cooler.

  • Report this Comment On October 12, 2011, at 2:17 PM, stan8331 wrote:

    I agree, but only in terms of the communication and marketing surrounding the pricing change, and the separation of the websites.

    The pricing change had to happen, or Netflix would have risked being left in the dust by streaming-only efforts from Amazon or other competitors. The worst decision in this whole sequence was the separation of the websites and billing. The only way that could have ever made any sense at all was if a sale of the DVD business was imminent, but the streaming catalog simply isn't yet strong enough to stand on its own.

    You're absolutely right that there should have been some sort of market testing or pilot study before any of these changes were implemented company-wide. I think Hastings really needs to concentrate on long-term strategy and allow others with greater marketing skills to figure out the best path to implementation.

  • Report this Comment On October 12, 2011, at 2:31 PM, xtall wrote:

    I recall reading comments from David and Tom many months ago about the acumen of Reed Hastings, as one we should have confidence in. What should I think now? Things aren't always as they seem? David? Tom? Your turn.

  • Report this Comment On October 12, 2011, at 2:44 PM, xtall wrote:

    Fortune should recall their award to Mr. Hastings as Business Person of the Year. Here is the opening line of an article about him last year.

    "Executives from Silicon Valley to Hollywood to Wall Street admires his savvy persistence - and his company's cool culture. The secret to the Netflix CEO's success? He never stops looking over his shoulder."

    I suggest sending him to a chiropractor to renew his ability to see 360 degrees.

    I am up 300% on this stock so will hold for now. I am a cheap customer of Netflix, using only the lowest level of service they offer.

  • Report this Comment On October 12, 2011, at 6:47 PM, dgrayxplane wrote:

    I respectfully disagree. All companies make mistakes. Hastings has spoken publicly about the Netflix culture and the difference between "good policies" and "bad policies." bad policies try to prevent mistakes that can't be recovered from. This is not a mistake of that kind.

    I agree that some kind of pilot or small-scale test would have been a good idea. But I am also confident that Reed Hastings has learned that lesson.

    Netflix is an innovative company in a competitive space. They will need to continue to innovate in order to be successful in their industry. And the won't do that if they are not willing to take risks and make mistakes.

    I am a Netflix shareholder and bought more shares this week because I am bullish on the company.

    What I see here is a company that is willing to make mistakes, and also willing to admit that rather than cling needlessly to a flawed strategy.

    What I see is a company that's willing to listen to its shareholders and customers and change direction because it's the right thing to do.

    There's a difference between listening to customers and letting investors drive your decisions. I think Hastings is doing the former.

    I really don't understand why people are pillorying Hastings for this. Companies that react based on short-term, short-sighted investors are not solving for the long haul. Jeff Bezos of Amazon has a long-term vision and is on record saying he will ignore the short-term logic of the street. I think that's a good policy and I hope Reed Hastings will follow that lead.

  • Report this Comment On October 12, 2011, at 9:56 PM, four2x4 wrote:

    I wonder how Reed Hastings is sleeping these days?

    I cannot, cannot believe that this person is a CEO of anything.

    Qwikster? I cannot even remember how to spell it from one time to the next. Now , that may be an insult to my own intelligence, but I can remember "NETFLIX", and spell it right every time.

    I constantly wanted to spell it "Quickster"

    I remember having the 1-at a time DVD rental with my service. I rarely used it. Maybe a DVD a month. There was one time where I'd rented a DVD from them and kept it for 3 months before returning it. I kept paying my extra few bucks a month though. It wasn't enough to bother me. But the near-doubling of the price DID. And now they've lost me completely.

    OMHO, they should have offered some sort of limited plan for those like me who only use the mailing service once or twice a month. I would have been willing to pay a few bucks for that.

    Finally, if they were intent of truly separating the company, how about names like: QuikFlix, FastFlix, FlixQuick, etc.. Don't matter if the domains are used or not. They can be bought.

  • Report this Comment On October 13, 2011, at 8:48 AM, XMFAlaska wrote:

    Hi folks. Thanks for all your great comments, and for sharing your experiences both as customers and investors of Netflix.

    Dgrayxplane, I completely agree with you that smart companies are driven by customers, and don't disagree with you about Netflix abandoning Qwikster. I think the benchmark of any healthy, viable company is the ability to make mistakes and then correct them. I'm wary of companies that have never done either. My ongoing concern about Netflix is the way that Qwikster was rolled out, so quickly, with seemingly little input from customers, and without even basic infrastructure (i.e., the website) in place. It was such a big move, made with so little thought, that I think will have very long-lasting consequences.

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