What Netflix Must Do Next

It's hard times for Netflix (Nasdaq: NFLX). The share price has fallen off a cliff to less than one-quarter of its 52-week high. It has angered its customers and damaged its brand. And the rocky terrain of its competitive landscape is inhabited by Amazon.com (Nasdaq: AMZN) and the threat of Apple (Nasdaq: AAPL) wielding its enormous resources.

But maybe there is a narrow path out of this precarious spot.

Let the right one in
At the close of the quarter ended Sept. 30, 2011, 91% of customers are now using Netflix Internet streaming delivery. The costs for this content library total nearly three times as much as the DVD-by-mail library, which is why CEO Reed Hastings rightly understood the need to raise the price of the streaming service. He of course also attempted to convert the company to streaming-only with the aborted Qwikster/Netflix split.

I applaud Hastings for his long-term thinking and for acting now to do what is best for shareholders and employees in the future. But it was sudden and heavy-handed, and an important stakeholder was overlooked: the customer. This needs to be corrected, and soon.

Mad Max
I recently had an experience with yet another Netflix competitor, the sleeping behemoth Verizon (NYSE: VZ), where I was given Cinemax for free. This included channels like ThrillerMax, OuterMax, ActionMax, and MadMaxMax (I may have one of those wrong).

I was stunned. It came without any strings attached and no trial period -- Verizon just handed it over. I liked that. And it made me forget, for a time at least, the awfulness of paying Verizon for the ability to watch relentless streams of commercials that have been synchronized across the channels for maximum annoying affect.

The Shawshank Redemption
Like Verizon did with me, Netflix needs to make its subscribers feel better. A lot better. The company needs to get customers feeling good about Netflix again. Fool co-founder and CEO Tom Gardner suggested that Netflix should start offering smaller films for free and announce new content partnerships -- even small ones. I agree. It should also:

• Offer a few extra months of free service, based on tenure.
• Add video game rentals at no extra charge.
• Drop the extra charge for Blu-ray discs.
• Arrange for employees to give subscribers long, awkward hugs (still thinking this one through).

Will this hurt the balance sheet? Yes, in the short term. But if Netflix does not regain the love of its subscribers, the landslide will continue, and Amazon, Apple, and the cable companies will begin stealing away a disenfranchised subscriber base.

Paths of glory
It will be interesting to see if in 2012 Netflix will make delighting subscribers a top priority. Weigh in with your thoughts below, and add NFLX to your Watchlist to see whether Netflix will survive.