Heads Roll at Netflix

At Netflix (Nasdaq: NFLX  ) , mediocrity just doesn't cut the mustard. "Unlike many companies, we practice: adequate performance gets a generous severance package," according to the firm's recruitment materials. Don't expect to be coddled by buddies here, in other words. You're told before you even apply for a job that you'll be harshly judged.

The video service had a bad year in 2011, at least seen through the lens of public opinion. The one-two punch of higher prices (if you want both DVD and streaming services) plus the Qwikster split slashed share prices from yearly highs over $300 to a low of $62.37 -- a nearly 80% plunge in less than five months.

CEO Reed Hastings admits that communicating the changes was a big part of the problem. It was never clear to the average consumer why the new pricing plans weren't a 60% ripoff, or why Qwikster was a good idea. Hastings apologized for the lack of pricing explanation (oddly, while announcing the terrible Qwikster idea), and promised to do better.

Last Friday, longtime Chief Marketing Officer Leslie Kilgore left her position in the hands of an interim replacement.

What's going on?
Is this a case of the other shoe dropping? You could certainly argue that the company's public image took a beating in 2011, which hardly qualifies Ms. Kilgore for an A+ grade.

But this doesn't seem like a hard-nosed punishment when you look deeper. Rather than getting kicked out on the street with a generous severance package, Netflix is keeping Leslie Kilgore in the house by appointing her to the board of directors instead.

In 2010, Kilgore pulled in $2.8 million in combined salary and stock options grants. According to last year's proxy filings, she'd qualify for a $1.4 million severance payment if she were terminated. That's big enough that you'd hope to see it disclosed if the termination package were triggered, and we haven't seen that.

Granted, non-executive directors make a lot less than Kilgore's lavish CMO contract, collecting $312,000 for services in 2010. But Leslie will still be involved in the company as one-eighth of a rather small board, so it's not like she was fired and told never to darken the doors again.

How does that outcome play against Netflix's stated "excellence or nothing" approach? Flip further down the recruitment presentation, and you'll also see that nobody is expected to be perfect. "High performers make few errors," but not zero. "Just fix problems quickly."

So as long as Ms. Kilgore could remedy the summer's missteps, that's all right. After all, in a culture where nobody can afford to take a risk, you'll never see the high performance that Netflix says it wants.

Rather than a stern house cleaning, I think Netflix is just looking to improve the marketing and communications functions as the company grows. Ms. Kilgore has held this job for 12 years. Bringing in a seasoned professional to lay fresh eyes on the marketing challenge sounds like a good idea. In other moves, Senior VP of Corporate Communications, Jonathan Friedland, gets a title upgrade to Chief Communications Officer and now reports directly to Reed Hastings. There are now two C-level communications officers instead of one. Moreover, the old CMO still has a strategic finger in the pie. It's an increasingly important and complex function, especially in light of the ongoing international expansion.

Should the captain go down with the ship?
Moreover, Hastings actually took personal responsibility for the miscommunications because he had failed to explain to his own people what was going on. It'd be dishonest to lay the blame on the CMO under those circumstances.

Some would say that Hastings then should let the axe fall on his own neck. He's been called out as the worst CEO of 2011 by several publications. Why not live up to his own philosophy?

I'd say you're jumping to conclusions. In this press release, Hastings applauds Kilgore for being instrumental in "our recent return to solid growth." That sounds like the holiday quarter saw a return to growth, and we'll hear Tuesday night exactly how much as Netflix gets set to report earnings. If so, it would be premature to punish Hastings -- or anybody else -- for 2011. They took a risk, it didn't work out exactly as planned, but the seemingly business-killing backfire becomes a mere speed bump and life goes on.

Haven’t we been at this crossroads before?
Remember when Wal-Mart (NYSE: WMT  ) and Blockbuster conspired to kill Netflix in 2006? Well, Sam Walton's retail empire couldn't figure out how to run a DVD mailing business and eventually sold its customer lists to Netflix. The Total Access debacle was the cash-sapping beginning of the end for Blockbuster, now a small part of an ambitious digital media puzzle for corporate parent DISH Network (Nasdaq: DISH  ) . Netflix stood tall and delivered under heavy fire. And nobody cares about the 40% drop from 2006 highs to 2007 lows now, though it looked like certain doom at the time.

The challenge is different this time. Rather than carving out a whole new industry from virgin bedrock, Netflix now faces established online video competition from Amazon.com (Nasdaq: AMZN  ) , Hulu, and Apple (Nasdaq: AAPL  ) . None of these actually compete on equal terms with Netflix today, but they all hustle for the same consumer attention. I think it's important to build the market position you want while the market is still young, so the revamped marketing team will need nearly superhuman powers of persuasion.

When all is said and done, Netflix wants to rule the world. These three American companies are showing Hastings how it's done.

Fool contributor Anders Bylund owns shares of Netflix but holds no other position in any of the companies mentioned. The Motley Fool owns shares of Amazon.com, Apple, and Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of Wal-Mart, Amazon.com, Apple, and Netflix. We have also recommended creating a diagonal call position in Wal-Mart and a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. We have a disclosure policy.


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