Coming this fall to a school near you: "Gaffes 101: How to Turn a Successful Business Into the Laughingstock of Wall Street in Six Months" -- taught by Reed Hastings.

Watching the drama unfold lately at Netflix (Nasdaq: NFLX) is like watching Leon Lett trying to run a fumble back for a touchdown -- it's exciting, but you know it's not going to end well. Just weeks after the company unveiled plans to split the company's business into two separate entities -- streaming video and DVDs -- CEO Reed Hastings abruptly reversed course yesterday and snuffed out the entire concept of Qwikster with a spokesperson for the company claiming, "We underestimated the appeal of the single website and a single service."

Well, folks, I'm banging my head against the wall now more than ever. I can't say I disagree with the decision to keep the company integrated (seriously, who would have ever guessed that users like everything in one place?), but the timing of the decision perplexes me. It hadn't even been three months since Netflix introduced the world to Qwikster, and now it's taking it away before it even made an appearance.

The stock popped yesterday in response to the news but abruptly reversed course and finished the day down more than $5. "Why?" you might wonder. Because shareholders have lost confidence in Hastings' decision-making ability.

Think about it. This isn't the first time Netflix has gotten out of the clown car in the past three months. In July, Netflix announced a 60% price increase to its streaming video and DVD package, with the expectation that it would lose customers from such a large increase. It's not as if the company hasn't raised prices recently, either -- it enacted an 11% price increase late last year. But as Fool and avid Netflix user Anders Bylund points out, it's also not as if the user is getting anything extra for this massive jump in price. Here's the real kicker: In September, the company was forced to revise total subscribership down by 1 million more than its original loss expectations.

Indeed, Christmas has come early for the streaming-video and DVD-rental sector. Coinstar's (Nasdaq: CSTR) Redbox, Amazon.com's (Nasdaq: AMZN) streaming business, and even DISH Network's (Nasdaq: DISH) recent purchase of Blockbuster are all set to reap the benefits of ticked-off Netflix customers. If you haven't noticed, Blockbuster has taken up an advertising campaign squarely against Netflix's DVD business in recent months. When the smallest kid in the class starts picking on you, you know something's wrong.


Growth prospects for Netflix aren't even that strong, either, for two primary reasons. First, the barrier of entry in the streaming-video segment is almost nonexistent. It wouldn't be a shock to see Google, Apple, or Microsoft, with their mountains of capital, enter the streaming-video market in the near future. I also wouldn't be surprised if Amazon, with its $6.4 billion in cash, is able to broker enough media deals to equal Netflix's library size in just a few years.

The second problem I have with Netflix is its lack of revenue diversification. Netflix derives nearly all of its revenue from the United States and, aside from plans to expand into Latin America later this year, has very few untapped roads to new revenue … other than to crush its current customers into submission with price increases.

I really don't know what’s worse -- the original decision to create Qwikster, the flip-flop of that decision, or the fact that Hastings doesn't have a clue what his customers want. Until investors believe that they can trust Netflix, and I don't suspect that'll be anytime soon, I anticipate that the stock price will continue to languish and the mass exodus to Amazon will accelerate.

Putting your distaste for the price increase aside, take the time to vote in the following poll on whether you believe that Hastings has what it takes to keep Netflix relevant in the streaming-video space.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He has thus far resisted the urge to subscribe to Netflix. You can follow him on CAPS under the screen name TMFUltraLong

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