1 Thing That Would Double Netflix's Stock Overnight

Netflix (Nasdaq: NFLX  ) shareholders aren't in a good place right now.

The stock has surrendered more than 80% of its value since peaking last year, and it's not as if Netflix is just a fifth of the company it used to be. It closed out its latest quarter with more than 30 million subscribers worldwide. Profitability and high-margin DVD-based subscribers aren't what they used to be, but is that really worth the pounding that the stock has received?

Thankfully, the easiest path to a turnaround is in the company's hands. Unfortunately, Netflix is too proud to make it happen.

In a Wall Street Journal interview earlier this week, Netflix CEO Reed Hastings was asked about moving away from the $7.99 monthly ceiling on the streaming end. Why aren't there tiered pricing levels? Why isn't Netflix offering piecemeal digital rentals of new releases the way Amazon.com (Nasdaq: AMZN  ) and DISH Network's (Nasdaq: DISH  ) Blockbuster do?

You're not going to like Hastings' response.

Get your new videos elsewhere, folks
"
Our fundamental view is we grow revenue by expanding the number of members, rather than increasing the pricing," he says, emphasizing the clear and simple value proposition of its smorgasbord. "That's why we don't have pay-per-view video and we don't have ad-supported video."

It's easy to understand the reluctance to embrace ad-supported video. Let Hulu and Google's (Nasdaq: GOOG  ) YouTube deal with the freeloaders willing to put up with video ads for the sake of viewing free content. It's also easy to grasp Netflix's aversion to tiered pricing. Cocky studios will begin demanding that their content be part of the highest tier, and that will stigmatize the programming on the cheaper tiers. Patrons may also resent the class warfare.

You win, Hastings. Nyet on those two revenue channels. However, this isn't a good argument against pay-per-view video.

Supply and On Demand
"Netflix is $7.99 for unlimited streaming," Hastings says. "That's what we're interested in. We don't do download and store on your device so you can go into the remote mountains and watch. It's not that there's not a little market for it, but it's just too complicated."

No, dude. It's not complicated. Amazon does it. Blockbuster does it. Apple (Nasdaq: AAPL  ) does it. If it's a "little market," it's only because Netflix is not doing it.

Netflix is the only company with the foundation and credit card information in place to serve streams to tens of millions of people through their TVs. It's not about a single device along the lines of Google TV or Apple TV. It's not about trying to do so many things -- hello, Amazon.com -- that you become a jack of all trades.

Only Netflix has seamless streaming through all three video-game consoles. Only Netflix has several manufacturers of Blu-ray players willing to add a "Netflix" button to their remote controls.

What is the top knock on Netflix's streaming service? It's not the price. Folks leave because there's not enough new content to watch.

Why force subscribers to wait years -- if not longer -- for the new retail releases to be available through Netflix streaming? Why force them to keep their cable providers around so they have access to pay-per-view? Why make them drive out to the nearest Redbox or Blockbuster for a physical disc rental?

Hastings may think that adding pay-per-view would confuse subscribers. As a subscriber since 2002, I can vouch for most of my fellow members. We're not stupid. We'll get it. The $7.99 a month monthly smorgasbord won't blur as a value proposition.

More importantly, Wall Street will get excited in Netflix again. It will no longer be about the slow creep of average revenue per user down to $7.99 a month. The market will begin wondering about how much more Netflix can make by providing more value and convenience to its customers. The conversation won't be about Netflix as a "rerun TV" novelty. The focus will be on Netflix turning into the cornerstone of a home's media entertainment system.

How much lower must Netflix's stock go before Hastings realizes there is little to lose and so much to gain by opening this fire hose? Whether it's a retention tool or a revenue boost, it's time to get complicated because simplicity is failing.

Stream on
A new premium report on Netflix details the opportunities and challenges in store for its shareholders. The report includes a full year of updates, so time's ticking. Check it out now.

The Motley Fool owns shares of Google, Netflix, Amazon.com, and Apple. Motley Fool newsletter services have recommended buying shares of Google, Apple, Netflix, and Amazon.com, creating a bull call spread position in Apple, and creating a bear put ladder position in Netflix. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz has been a Netflix subscriber and shareholder since 2002. He owns no shares in any of the other stocks in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (11)

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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 29, 2012, at 1:11 PM, rhealth wrote:

    Rick, this is why he is the CEO and you are not. Some build their companies on simple ideas and they hold to them creating an unshakable reputation. Coke and apple come to mind.

    Other companies sit around backengineering, creating a product that is crafted well, but lacks synergy, Samsung comes to mind., both have a place in the market, but the models cannot be interchanged.

    Netflix may or may not prosper in the future, but, as an example of the former model, if they took your advice, their failure would be assured.

  • Report this Comment On September 29, 2012, at 2:31 PM, 313neptune wrote:

    I think it all depends on how much it costs Netflix to stream a video vs. 7.99/mo. If they offer a pay-per-view that does complicate things. It changes their whole pricing structure. It voids all their current contracts and opens the door for more complicated contracts. Also, think of what audience they are going for. You get it, sure. But a lot of us don't. The parents who are paying 7.99 a month to allow their kids to watch unlimited movies won't suffer insane monthly bills for kids that watched unlimited pay-per-view. Yes, the other companies are doing it. So it's refreshing to know one company is staying reasonable. And maybe...just maybe...they don't want to compete with those companies and/or wall street. That way of thinking is pretty complicated for wall street.

  • Report this Comment On September 30, 2012, at 2:41 AM, firemachine69 wrote:

    This whole Netflix fiasco is absoluted RE-TAR-DED.

    Mr. Hastings, give me your paycheck, because you lack the gonads to do something so impeccably simble, you don't deserve a dime of shareholder dollar:

    Step ONE: Drop the fee to $2 a month, charged annually. That right, two bucks. That's for the unlimited access to all those $5-10 DVD's you find in Wal-Mart's bargain bin you'll likely only ever watch once or twice.

    Step TWO: Rent new releases at an absurdly competitive price. I suggest $3 a pop. Unlimited access for 24 hours.

    Step THREE: Roll in the ka-ching.

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