The fall from the top of the mountain has been fast and furious for Netflix (Nasdaq: NFLX) investors over the last two months. This morning's announcement revealing the company would split into separate streaming and DVD-delivery businesses has provided some relief, but as fellow Fool Rick Munarriz pointed out, Netflix's problems are bigger than a quick fix.
As a former Netflix user who gave up on the service after a few months, maybe I can provide some insights to how the non-believers see Netflix. I gave up on the DVD and streaming service after running through all of the old movies I wanted to see, and becoming fed up with a disappointing streaming lineup. So how can Netflix get me back?
Now that Netflix has dropped the DVDs into a subsidiary to focus on the faster-growing streaming business, there are a few ways to make Netflix better. However, doing so might require a few changes to its seemingly untouchable business model.
Netflix's power goes to its head
The beautiful thing about Netflix's streaming model is that customers can get shows and movies anytime, on almost any Internet connected device. Netflix has penetrated Apple (Nasdaq: AAPL) iPhones, iPods, and iPads along with Microsoft's (Nasdaq: MSFT) Xbox and Sony's Playstation. It offers content when I want, where I want. The concept couldn't get any better.
What isn't beautiful about Netflix is the content available for streaming. I originally signed up for Netflix to watch Showtime shows like Dexter and Weeds, but once you get hooked, Netflix comes up short by not offering more recent seasons. I understand Showtime's desire to sell DVD packages to those of us without Showtime on cable, but there must be another way!
Netflix apparently balked at Liberty Starz's insistence on a premium-pricing tier, instead of a $300 million-a-year fee for access to the Starz library. The company that created an innovative way to stream TV shows and movies just wasn't willing to come up with an innovative solution for an important content provider.
And this is where I think Netflix needs to consider its importance to customers.
Netflix isn't the only fish in the sea
I get the feeling that Netflix was feeling a little more powerful than it really was, after the company's stock run-up and the constant pats on the back to CEO Reed Hastings. But the recent subscriber news has to hurt, and with competitors like Hulu lurking in the background, there's no reason to think that Netflix has an impenetrable business.
After years of consolidation, most media is housed under Disney (NYSE: DIS), Viacom, News Corp., Time Warner (NYSE: TWX), and Comcast's (NYSE: CMCSA) NBC Universal. These players have all of the power when it comes to negotiations with cable companies, and now with Netflix. They could also create their own streaming services by building apps for Apple and Google (Nasdaq: GOOG) Android devices.
That's why it's paramount that Netflix come up with a way to provide multiple package options to customers. iTunes offers one-time rentals and purchases that Netflix can't currently match -- but why shouldn't it? How about a $10 fee for a Dexter Season 5 marathon, or $15 to catch up on True Blood?
Netflix could even let content providers create their own pricing, with a 30% margin for their trouble. That way, consumers could decide what price they're willing to pay for which content. With streaming, the cord is easy to cut, unlike cable, which packages hundreds of channels together. Content providers would have to quickly adjust to the changes in plan subscribers.
The bottom line: Netflix's single rate won't work forever.
The $76 billion gorilla
Let's not forget about the company Netflix should be scared of most in the content-distribution business: Apple.
Right now, Apple might not seem like a direct competitor. But with a few tweaks to the Apple TV and a few new content deals, Apple will be breathing down Netflix's neck. Apple has more than enough to spend on those deals, thanks to its $76 billion cash hoard. After redefining the music business, it only makes sense that Apple would do the same with TV shows and movies.
Outside the box
Netflix has ridden fixed content costs and rising customer numbers to success over the past few years. But now that its growth has slowed, it's time to rethink that model.
Content providers like Starz have started to reconsider their value to Netflix, as Big Media tries to forge a future for its industry.
Netflix needs to maintain its position at the center of that media future. It can only do so by expanding its offerings and its customers' options. In my mind, Netflix can remains relevant only if it can begin to replace cable for some customers. Those who want to see a show NOW, regardless of the channel, should be turning to Netflix first.
If Netflix could provide nearly every show or movie I want, whenever I want -- even at a higher price -- that would be a real game-changer.
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