Is Reed Hastings Fit to Be Netflix CEO?

Now we know why Netflix (Nasdaq: NFLX  ) ended Qwikster before it began. More than 800,000 subscribers quit the service last quarter amid changes made by CEO Reed Hastings and his team, far more than Wall Street expected and enough to lead investors to dump the stock in afterhours trading last night.

My Foolish colleague Anders Bylund will be running down the numbers in the earnings report. I'm writing to dig into a bigger question I'm increasingly hearing from subscribers and investors alike: Does Hastings know what he's doing?

"I wish I could make a horrible decision and only after everyone knows it was horrible, apologize and be hailed a prophet," wrote All-Star investor BillKaufman in response to the Qwikster reversal.

He and many others wondered why Hastings was praised for backing off a decision that almost everyone outside the company knew was bad from the get-go. Or as Foolish investor JeF4y put it in commenting on the sorry-we-were-just-kidding nature of the change: "It's like they're playing a bizarre game of 'what [else] can we do to erode market confidence and shareholder value?'"

It is time for Reed to go?
Shares of Netflix are poised to fall substantially in today's action, wiping out a 1% gain eked out in the aftermath of the Qwikster debacle. The free fall forces a question implied by yet another comment by our Foolish readers.

"Hastings' maneuvers have demonstrated such a consistent ineptitude, they're as entertaining as some of their flicks!" wrote arefool2b. Really? If that's true -- if Hastings really is inept -- then shouldn't the board fire him? I'm not so sure.

But it would also be folly to simply dismiss concerns. To be fair, we ought to look at what happened with both Qwikster and the price increase and then assess whether the mistakes and the ensuing responses were legitimate, ill-conceived, or inept.

The 60% price hike
Netflix announced in July that it would end inclusive plans by Sept. 1. Subscribers who wanted both DVDs and online streaming would have to pay for two separate plans, $8 apiece. Previously, renters could check out one disc at a time and enjoy unlimited streaming for $10. Thus, the infamous 60% price increase.

Was the move legit, ill-conceived, or inept? It might be too early to tell, but the initial numbers suggest a problem. As my Foolish colleague and Motley Fool Rule Breakers teammate Rick Munarriz points out here, there were plenty of disc-only subscribers who used the service happily before the price change. Now, they're fleeing -- and in far greater numbers than those who were opting for streaming-only plans. That's a huge problem.

Hastings seems to know it, too. "Moving forward step by step, despite the foot with the bullet hole," he said in announcing a deal with DreamWorks Animation (NYSE: DWA  ) via his Facebook feed last month.

We don't know exactly what Hastings sees as the "bullet," but it's a good bet he knows that a price hike got people thinking about alternatives. My own conversations with friends revealed that many who had tried Redbox intended to commit to the service and dump Netflix. Still others said they were getting enough streamed content from cable and satellite providers to feel comfortable canceling Netflix. Now we know this wasn't just talk. Subscribers fled in huge numbers.

Qwikster or quicksand?
When Netflix first announced Qwikster, media and investors alike focused on new burdens it would place on users. A separate website. A separate login. No more consolidated queues, no more comprehensive recommendations. DVD and streaming would be entirely separate businesses held by Netflix.

Was the move legit, ill-conceived, or inept? I'd say inept, if only because I can't think of a single Netflix subscriber who liked the idea. If anything, the confusion created by splitting the services led my Foolish colleagues to wonder if Amazon.com (Nasdaq: AMZN  ) would seize the moment to kill Netflix.

Qwikster also made Hastings seem unfocused and desperate. Hastings announced the change in an otherwise contrite blog post about mistakes made in announcing the price increase. He also announced plans to compete with GameStop (NYSE: GME  ) and DISH Network's (Nasdaq: DISH  ) Blockbuster in renting console video games via Qwikster. Netflix the leader had suddenly become a follower.

The opportunity ahead
Judging by his comments during last night's call, I'd say Hastings knows he screwed up. "After the price increase, Qwikster became the symbol of Netflix not listening," he said.

He's right. Netflix had a good thing going before Qwikster -- a comprehensive service that, whether it wanted to admit it or not, Hollywood had become dependent upon. That's still true. Even if 800,000 have left for Hulu or Amazon or some other service, millions of us still rent DVD and Blu-ray movies via the red envelope.

So while Hastings and team have work to do in order to restore Netflix's reputation, the task is probably easier than today's sellers think it is. Customers who've suffered through this summer's debacles aren't likely to leave now.

Which brings us back to the question we led with. Should the board fire Hastings? I can't see it. Yes, he made mistakes in rolling out the price increase. Yes, Qwikster was a bad call. But Hastings has also admitted both errors and is working to make good. There isn't much more we can ask from a leader.

Let's also remember that we're far from figuring out a comprehensive licensing structure for on-demand content. Netflix is a key player in the debate, having decided not to pay $300 million to re-up with Liberty Starz (Nasdaq: LSTZA  ) . Do you or don't you want Hastings at the table for these discussions?

Count me among those who'd much rather have him negotiating for Netflix. We've already seen what he and his team can do. They've replaced Starz with DreamWorks and a new direct deal with AMC Networks (Nasdaq: AMCX  ) that includes the popular post-apocalyptic drama, The Walking Dead.

Call it symbolic. Netflix may feel like the walking dead today, but with Hastings at the helm, I suspect it won't be long before the company is walking tall again. Technology is becoming an increasingly important part of how we live our lives, and also in how we invest. The Motley Fool recently compiled a research report detailing another massive opportunity in the technology field, free of charge for our readers. I invite you to grab your free copy by clicking here.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Netflix at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of GameStop. Motley Fool newsletter services have recommended buying shares of Netflix, Amazon.com, and DreamWorks Animation SKG. Motley Fool newsletter services have recommended writing covered calls in GameStop. Try any of our Foolish newsletter services free for 30 days. 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 (23)

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 25, 2011, at 2:15 PM, damonksoul wrote:

    Reed is becoming (had become) the Jerry Yang of Yahoo! It's time for fresh perspective and new ideas. On a side note the postal services troubles are to be closely monitored... Rates going up will severely hurt nflx margins.

  • Report this Comment On October 25, 2011, at 2:26 PM, velo15 wrote:

    My 22 yo step-daughter convinced me as to why NFLX is the future. Her comment counters the "I can stream my cable content already" . . . you can if you have cable. 20 somethings think like my step-daughter: "why would i pay $80 per mo to Comcast to watch what I can get on Netflix for $8 per mo". I believe this is the future for Netflix - people who will think cable pricing is ridiculous and won't care about the time lag of viewing content.

  • Report this Comment On October 25, 2011, at 2:50 PM, hellomojo wrote:

    I doubt it matters who is running nextflix anymore... its a dying business. For those who don't want to pay a monthly fee, there are plenty of free streaming options to occupy your time. For those who do want to pay, there are now choices other than netflix. Netflix big problem will come from the fact they have no integrated hardware solution, only content contracts. Once Apple, Amazon, Microsoft, Sony, etc,etc...One of the big boys with hardware, software, and multiple viewing platform options pull it all together and then sign content deals equal to or better than Netflix...they will crumble.

  • Report this Comment On October 25, 2011, at 2:51 PM, Randseed2 wrote:

    NFLX obviously got hammered hard today, on the order of -35%. (Disclosure: Yes, I lost a good bit with this, but my NFLX exposure was relatively low.) I think it was a bit of an overplay by the market, though.

    First, yes, NFLX has announced a lower earnings forecast for the next quarter. What isn't figured into this -- or at least not well -- is reduced operational expenses. In other words, if I subscribe to their DVD plan (which I do) and it takes, say, $0.15 for them to ship me a CD and then another $0.15 for me to ship it back, the math isn't very hard here. $0.30 round trip for the DVD, and if I utilize their service at a 100% duty cycle, then that operational overhead is a good chunk.

    Second, don't underestimate the operational costs of the streaming. It's a lot of bandwidth.

    I can't say I really blame NFLX for splitting the streaming and DVD services. Unfortunately, they screwed themselves because they set the standard of it being a bundled package deal.

    CoinStar, which runs Redbox, had what I for a long time thought was a pretty bad business model. Why, I asked, would I even deal with Redbox when I could subscribe to Netflix? But these events do change things. Effectively, Netflix, which was making money, changed its business model in such a way as to make their competitors more attractive to consumers. Bad, bad idea.

    Netflix does have the ability to use XBox 360, etc., as platforms too. They would probably get a lot more "geek cred" and resultant "geek business" (don't underestimate this) if they would just release a Linux player. But it is what it is.

    I think NFLX will come back, and at this point I'm looking at the $77 stock price as a bargain. I just wish I'd not bought it at $118.

    As for the CEO, he needs to either get his stuff together to attract customers back to his service, or resign. This situation is salvagable with only a little bit of net damage, but it will require NFLX to be humble and admit to consumers that they screwed up.

  • Report this Comment On October 25, 2011, at 2:55 PM, Randseed2 wrote:

    And I agree with what Hellomojo just wrote too.

    Hell, I drive past a gas station with a Redbox every day. It would be pretty convenient to whip in, exchange DVDs, and whip out. Not a problem at all.

    For streaming, I confess that I'm not fully aware of all the alternatives out there. Neither are a lot of consumers. Netflix is a household name. Hulu, etc., are not. The alternatives can kill Netflix's market share if they'd advertise.

    That said, I think the company will survive. They just need to really get their stuff together.

  • Report this Comment On October 25, 2011, at 3:10 PM, memoandstitch wrote:

    It's time for TMF to deflect blame onto Reed Hastings.

  • Report this Comment On October 25, 2011, at 3:38 PM, DJDynamicNC wrote:

    I can't imagine ever paying for cable. If I were going to watch TV or movie content on a regular basis - and someday when I have more time and a bigger family, I probably will - I'd use Netflix or something comparable. Since so far there ISN'T anything comparable, Netflix would be my choice

    I respect a person who can admit they made mistakes, and learn from those mistakes. I think Hastings deserves a chance to make up for his screw ups.

  • Report this Comment On October 25, 2011, at 3:45 PM, midnightmoney wrote:

    memoandstitch,

    I'm curious what you mean by your comment. Are you saying TMF is somehow culpable here?

  • Report this Comment On October 25, 2011, at 3:47 PM, chadscards1274 wrote:

    I'm amazed at the lack of real comparison shopping going on. I have read multiple articles about how NFLX is in trouble because of other services like AMZN Prime or Hulu or even OnDemand content from cable providers. Now for a reality check:

    1. Hulu - much better then NFLX for current episodes of TV shows, horrifically worse for Movies.

    2. AMZN Prime - stop the madness 12,000 titles and there are maybe 50 that are worth the time to watch. When people complain about NFLX streaming content not being up to par they obviously haven't really looked at AMZN Prime's options.

    3. OnDemand - come on, really? For TV why do I need this when Hulu Plus is $8 a month? For movies I'll take NFLX anyday.

    I agree with the prior poster who said that his daughter would rather watch stuff on NFLX for $8 a month streaming then pay a ridiculous cable bill. The other piece that really makes no sense is the defection of NFLX subs who were using the DVD only plans. If you weren't using streaming and instead used DVD only then why would you be upset by the plans being split? Just change to the 1 DVD out plan and save $2 a month. In my household's case we did the opposite and dropped the DVDs and switched just to streaming.

    Last but not least, I think longer term the content is what will determine the fate of NFLX. Their deals with hardware manufacturers is another key factor. Like it or not it's hard to find a streaming media device, or streaming Blu-ray player that doesn't list NFLX as it's first streaming option. I think NFLX could have done this better by gradually increasing the pricing instead of all at once, but over time new subs won't care about what the prices used to be and I'm willing to bet that some of the old subs will come back once they realize that NFLX does really have a good service - you might just have to choose which half of the service you prefer.

  • Report this Comment On October 25, 2011, at 4:05 PM, bobyk3 wrote:

    Netflix is not supposed to be a core investment. Accept it and move on.

    Netflix's accepts the current business model does not work.

    As a separate business or as seperate plan or as a higher priced plan, mailing business would die. Redbox is much more convenient.

    With streaming, with Apple, Amazon, Google, Walmart etc, it can well be an accident waiting to happen.

  • Report this Comment On October 25, 2011, at 4:11 PM, uaku wrote:

    Well all I can say the CEO figured it out how to screw himself

  • Report this Comment On October 25, 2011, at 4:15 PM, catoismymotor wrote:

    Is Reed Hastings Fit to Be Netflix CEO?

    No. What he did was stupid. Hubris on this level is truely worthy of a firing.

  • Report this Comment On October 25, 2011, at 4:34 PM, MFAbbott wrote:

    This entire fiasco is a case of throwing out the Baby with the bathwater. It's also a case of mass illusion... either in running up the stock price to $300 or in the dive to $75.

    I rent about 8 DVDs a month from Netflix. I go for the 2 DVDs out at a time for $12, which is $2 more than the standard price. They are easy and fun to choose and they arrive almost overnight from the post office.

    I can hardly believe that Netflix is able to do this on the $12 a month I spend, considering that the cost for mailing 8 letters two ways would amount to probably 16 x .46 = $7.36. So that would then leave $4.64 per DVD rental fee... or .38 cents per DVD.

    Now... if I were to go to Blockbusters or Redbox, that'd be 16 trips in the car along with 1.5 hours of wasted time and no doubt it'd cost a whole lot more. Not my idea of convenience at all. I admire those folks who have the patience and time for all that driving and parking.

    Dish network? Sorry... I'm not into the $40 a month basic charge and then wonder what extra charges they'd stick me with. Streaming from Amazon? Not interested in their clunky interface filled with awful choices. I much prefer DVDs since I like detailed movies, not grainy streamed movies.

    Hulu+? I tried it and did not like it at all.

    So all those clever folks who think Netflix is dispensable and easily replaced will just have to show me a better deal.

  • Report this Comment On October 25, 2011, at 4:39 PM, thomrich wrote:

    Would Reed Hastings have tolerated such monumental blunders of an underling? What's really disturbing about this is that his moves were so obviously stupid that if I took 5 people off the street and asked what they thought of this strategy, it would have been unanimously laughed out of the room. I mean the policy almost smacked of contempt for his customers, and his non-apology later announcing Qwikster dripped with arrogance and contempt. If I had a vote, he'd be gone, and if I could, I'd sue him for gross negligence. He needlessly lost a lot of investors a lot of money.

  • Report this Comment On October 25, 2011, at 7:24 PM, TruffelPig wrote:

    When the captain has left the ship, the MF crew will still be aboard and sink with it. I think this company is sinking.

  • Report this Comment On October 25, 2011, at 8:25 PM, Bert31 wrote:

    I don't see a great future for Netflix. WHy? Bundling. Unlimited local and long distance, over 120 hi def channesl, DVR, on demand, and hi speed internet for $115/month. That is enough entertainment for one thing. Secondly, take away one from the triple play and price goes up for the other services, does not pay to cancel cable for Netflix. With netflix you will still need internet access which is the most expensive part of the bundle. You could get it on you ipad or other wireless Mobile service, but no a great alternative for family entertainment. Netflix gets squeezed at both ends; cable companies will try to control distribution by charging by data usage; and content providers will stop giving Netflix heft discounts. But I could be wrong, I just don't have enough faith in Reed Hastings to get it done.

  • Report this Comment On October 25, 2011, at 8:27 PM, hegibson wrote:

    Hastings is a PR train wreck. Someone needs to replace him as a talking head for the company. The timing of his gaffes was epic. The market is reeling from gonzos who invest like he markets, without good sense. Therefore you have a stock valued in the $200's and in short order it is under $100. Neither makes much sense.

  • Report this Comment On October 25, 2011, at 9:19 PM, Teo123 wrote:

    NFLX is a roller coaster ride, but one thing is certain: the management of the company has failed to take into account that customers (and competitors) can really affect a company's reputation. When NFLX changed its pricing scheme, I was affected to the tune of a 60% increase. I didn't hesitate -- and I agreed to pay the 60%. When my wife's Facebook friends started talking about it, she asked me if we really needed NLFX. "Seventeen dollars per month? Really?"

    I like the service, but when the price point changed I had to really think about whether I wanted it. Certainly it offers more than HBO. But, then NFLX responded, first by mocking people like my wife and then by simply dividing up the two services. The price never changed -- even after it returned to the original structure.

    In the meantime, of course, NFLX had other issues. Starz, which controls a substantial amount of streaming content, has not renewed its content with NFLX. Postal rates, likewise, are increasing. And then there are NFLX competitors, like Comcast, which control some of the distribution. They have no interest in making the service accessible. The costs are hitting this company pretty hard.

    To me -- and I don't have numbers in front of me so I have no idea what is real and what is not -- I would have told the one-out streamers ($8 per month) that they would have to at least agree to the two-movies at a time price. And I would have gradually increased price from there. This could have controlled some of the reputation risks associated with a 60% price increase. And it could have allowed NFLX to stay true to its one-time approach of being an affordable option to video stores (which are now replaced by AMZN Price, Hulu and free content providers).

    Now maybe that is not an option for NFLX. Maybe customer demands and price increases were such that they had to move ahead with a 60% price increase. But even if that were the case, they could have/should have delayed its implementation instead of mocking those of us who care about how much we pay each month to watch movies from our home.

  • Report this Comment On October 25, 2011, at 10:03 PM, skypilot2005 wrote:

    Tim,

    Step back and take another look. Hastings has to go.

    The customer is always right. They are leaving in droves.

    Sky Pilot

  • Report this Comment On October 26, 2011, at 1:08 AM, Maraith wrote:

    I had just started experimenting with Netflix streaming direct to my TV through Apple TV when the price change happened. I opted out of streaming (from Netflix) and got my two DVDs per month. Then Qwikster happened. I was not happy and was glad when the decision changed.

    Now I see the company is already shifting to streaming as its preferred mode. How do I see this? In my last six CDs, 3 were damaged to the point I could not play them and had to return them. This used to happen once in a year or so.

    Now, I can see that Netflix does not want customers like me. So I'm looking for alternatives.

  • Report this Comment On October 26, 2011, at 2:23 AM, 2subarus wrote:

    I am freaking out about the price dropping so low today, but I have to say as an investor and customer of netflix, I still see the dvd in the mail as a very viable business for quite some time still. think of rural communities, and just the ease of it. nothing compares because the streaming content is older stuff, it's never the new releases. either you pay-per-view out the nose via cable/dish, or use netflix, or go to redbox. Netflix is still the best deal right now. streaming is convenient for watching the older stuff and when a family only has one tv. Everyone has a dvd player by now, but not everyone has a laptop/ipad. i hope people start buying it again. and hastings, stop being so schizo!!

  • Report this Comment On October 26, 2011, at 2:25 AM, 2subarus wrote:

    i don't know why customers are leaving netflix. I thought most would make a choice between the two. i considered giving up the streaming and just keeping the dvds because it's the latest releases that I want. streaming is older content only.

  • Report this Comment On October 26, 2011, at 7:14 AM, Pandorabelle wrote:

    No. The drop in the NFLX bubble has been predicted for at least a year. People have either not been paying attention, or been fooled up until now.................Greed Hastings has been a master of INTENTIONAL deception that everyone believed; amortization scam, lying about sub numbers, obscene buybacks, bleeding the cash from NFLX....and now, finally the desperate Quixster pitch. He would come out at every earnings report with rosy expectations....then NOT take calls! At the same time, WS created a bubble w/the share price of NFLX, which was never worth $300....manipulating easily with a low float............................................NFLX has no proprietary business; it simply rents non-exclusive licensing rights--which any company with enough money can do. Hastings left no cash at a time when bandwidth charges for usage - that will be passed along to the customers - are on the horizon and big players can easily forego the NFLX middleman.

  • Report this Comment On October 26, 2011, at 7:27 AM, Pandorabelle wrote:

    Re: Quikster:

    "Was the move legit, ill-conceived, or inept?"

    It was DESPERATE. NFLX is BROKE.

    Everyone knew it was a bad move, but Hastings is scrambling to generate cash.

    Ironic that he has continued to regularly cash out his millions of stock options.

  • Report this Comment On October 26, 2011, at 3:18 PM, moredocm wrote:

    Sorry Tim, but I disagree. The sheer fact that they went 'Charlie Sheen' as a leadership team for 6 months is enough justification to toss Hastings and much of his team out. Their repeated mistakes over the course of the past half year run up to a decline of ~$11B in shareholder value. Let's not forget that this stock was above $300 not too long ago. Bad decision upon bad decision upon bad decision has driven it down. Imagine a world where base subscribers had not been rated up so ludicrously, where there was not some ridiculous announcement to bifurcate the user experience (and the business model), where a competent management team could handle bad PR, where there was not an 800K customer defection as a result, and where those quarterly numbers came much differently. This stock would be going north of $320 in that world. In this one, with Hastings' at the helm, it's a disaster for investors who owned the stock. As I write this, the stock is at $79. Al la Sheen, is this 'Winning!'?

  • Report this Comment On October 28, 2011, at 1:13 PM, dillon53 wrote:

    I own NFLX stocks, but don’t use Netflix or any other dvd- or streaming rental.

    That said, I am willing to accept that it is cumbersome to suddenly log in to two different accounts where there used to be only one.

    But what flusters me is that people make such a bug deal of a 60% price increase amounting to $6 more per month. SIX DOLLARS?!!!

    If people can’t afford these $6 more, perhaps they can’t afford movie rental in the first place.

    If we were talking about a 60% price hike for something costing hundreds or thousands of dollars to begin with, then a 60% price hike would be a different issue altogether.

    $6 more per month for Netflix. I am thinking about our utilities bill (air conditioner) increasing by 200% from May to November. Not $6 more; $160 more. Or buying beef or vegetables, that now cost about the same percentage more than what I am used to. The list goes on.

    Replacing Reed Hastings? I think not. I firmly believe the best candidate is someone who has made mistakes and owns up to their mistakes. He is a “burnt child,” meaning if he has any common sense, he now will think twice about innovations for something that worked so well just as it was.

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