All We Are Saying Is Give Reed a Chance

Good news: Netflix (Nasdaq: NFLX  ) CEO Reed Hastings is starting to rank high on many year-end lists lately.

Bad news: We're talking about Worst CEO of 2011 lists.

Our own Sean Williams pegs Hastings as the third most horrendous corporate helmsman this year. The only people who beat out Netflix's CEO are MF Global's Jon "I simply do not know where the money is" Corzine and KV Pharmaceutical's (NYSE: KV-A  ) Greg Divis.

If you think that Netflix charging $7.99 a month for a streaming service that it used to include at no additional cost to unlimited DVD subscribers this summer was greedy, Divis priced an FDA-approved pre-term-birth drug at $1,500 a treatment, when the previous option was priced closer to $20 per dose.

Appearing in a Daily Ticker segment yesterday, Hastings topped the list of Dartmouth professor Syd Finkelstein. The other two companies whose leaders round out Finkelstein's naughty list are Hewlett-Packard's (NYSE: HPQ  ) short-lived CEO Leo Apotheker and the co-CEOs running Research In Motion (Nasdaq: RIMM  ) .

Hastings also topped a poll by TheStreet.com earlier this month for the Worst Tech CEO honors, though I'm not sure if the sample size of 200 voters can be deemed all that scientific.

You're going to see more of these lists creep up in the coming days. Hastings is going to be a staple.

You used to love Hastings
Everyone points to Hastings' decision to begin charging for streams as his biggest mistake, effectively introducing a rate hike of as much as 60% to some dual-plan subscribers. However, analysts and investors initially cheered the July 12 announcement. The stock actually went on to hit a new all-time high of $304.79 the very next day. If Hastings is a bad CEO because of that call, then we may as well anchor him to Mr. Market.

I can proudly say that I was one of the few cautionary voices during that week's euphoria, just as now I find myself one of the few coming to Hastings' defense.

There are certainly plenty of things that Hastings has done wrong this year. The Qwikster decision was laughable, but at least he had the humility and gumption to reverse that call a few weeks later, before its official launch.

Last month's move to line up financing by selling $400 million in convertible notes and stock at battered prices is a crying shame in light of share repurchases completed earlier this year at dramatically higher prices. Of course! However, let's revisit the market's initial reaction to the "rate hike" in July. No one could fathom things getting this ugly this quickly.

When bad CEOs go good
Don't get me wrong. I think Hastings did some pretty stupid things. I think he's not doing himself any favors by avoiding obvious catalysts:

  • Where are the video game rentals that were supposed to be a part of Qwikster? Gamefly, Coinstar's (Nasdaq: CSTR  ) Redbox, and DISH Network's (Nasdaq: DISH  ) Blockbuster are all over this. Netflix has the regional distribution centers. It streams on all three gaming consoles. Come on! Keep existing DVD customers close and win over a new audience by appealing to this big market.
  • Play nice with the movie studios by offering pay-per-stream rentals of first-run films. Blockbuster does this, and it would eliminate the shortcomings of the unlimited streaming catalog that will always be lacking when it comes to fresh content. More important, it will revise projections of average revenue per user higher.
  • Consider streaming discounts for the larger unlimited DVD plans. Every company with more than one service loves to push the bundling value proposition, and this would get members to consider upgrading to larger plans instead of scaling back the way most of us -- me included -- did in response.

It's still not too late, Hastings. This isn't RIM, where there's little it can do to stop the gradual fade of BlackBerry users. This isn't a biotech, where the only feasible pricing strategy is outrageous. Netflix can bounce back in 2012.

In fact, depending on how far back you go, Netflix hasn't been a loser to long-term investors. Those who bought in at the beginning of last year are sitting on a 31% gain. Those who bought at the start of 2009 are riding a market-thumping 158% return.

If we're tagging Hastings as the worst CEO because of the stock's fall since its summertime peak, then we may as well also name him best CEO for the 74% gain it was showing year to date at its peak. Think about that. Everyone's coming down on him because of the ridiculous levels of capital appreciation that came before the tumble.

He's bad to shareholders only because he was so good to investors.

All we are saying is give Reed a chance.

If you want to follow this saga, track the latest news by adding Netflix to My Watchlist.

Motley Fool newsletter services have recommended buying shares of Netflix. 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.

Longtime Fool contributor Rick Munarriz has been a Netflix subscriber and shareholder since 2002. He does not own shares in any of the other stocks in this story, except for HP. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


Read/Post Comments (5) | 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 December 14, 2011, at 11:38 AM, BioBat wrote:

    It's not just the stock fall, it's the hubris he showed when raising prices arrogantly believing subscribers wouldn't defect to lower cost plans. By upping the price, the entire business plan and growth of Netflix didn't just stop, it hit a brick wall. Then to make matters worse, the expansion into Europe once was seen as a positive for growth, now looks like a panic to stem the growth of Love Film that will end up driving losses for Netflix for all of 2012.

    It wasn't just a case of a few mis-steps with Hastings and Netflix, it was a 6 months long blunder that has left subscribers pissed, investors hung out to dry, and a company that looks like it doesn't have a clue about what resonates with its remaining subs.

  • Report this Comment On December 14, 2011, at 2:29 PM, andy2012 wrote:

    who gives .... what you say!

    Don't say anything or write a usefull article!

  • Report this Comment On December 14, 2011, at 5:17 PM, brokeassbroad wrote:

    This is a cute article, but not as hilarious as the article over at Alpha - with its attending responses.

  • Report this Comment On December 15, 2011, at 2:43 AM, TradeDragonfly wrote:

    @Biobat

    I totally agree with you. People on this site seem to forget that when you buy a stock, you get the management that comes with it. It doesn't matter how good the product is, if the management destroys the customer base and wipes out 75% of your investment in a matter of months, I wouldn't be talking about how great they are. Netflix is trading at current levels for a reason. It's going to be earning negative all of next year, and who knows how long after that.

  • Report this Comment On December 15, 2011, at 10:42 AM, BioBat wrote:

    I loved Netflix. It was the best entertainment service around for your buck - absolutely no question there. But when I get an e-mail out of the blue telling me my plan will go up by 60% if I keep it all, I get p!ssed and I start looking at what else is out there.

    In my case, it turned out the Blockbuster by mail offered me a better deal than Netflix did. For $10 a month, I now get BluRay, new releases (although Blockbuster does have inventory problems on that end), in store exchanges (if I really want to), and video games. For the same price from Netflix, I get BluRay or for $8, I get DVDs only. Not bad but when I can get more for a comparable price, I'll take it. At least 800K other customers thought so too.

    Of course I could opt to spend $8 for streaming only but frankly, their catalog isn't really worth that once I've watched what I wanted to - it was a great supplement to DVD by mail but a poor replacement. Really, do I only want to watch the first 2 seasons of Rescue Me, Dexter and Sons of Anarchy? No, I want to be able to watch everything previously released. For that I need a DVD (or BluRay) addition. And for 2 years, that's exactly how management marketed Netflix streaming - you can watch everything you want at home and supplement it with DVDs for a complete package. Then we get a sudden about face because the financials weren't jiving and customers are left with a lackluster product unless their willing to pay up.

    In short, management ruined a lot of good with customers in one ill advised e-mail and haven't gotten it back.

    Ramble over.

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