For the first time in a long time, Netflix (Nasdaq: NFLX) enters a new year as an underdog.
CEO Reed Hastings is now coming under fire. Netflix shares have fallen for the first year since 2006, and fallen sharply. The stock is in a 60% hole year to date with three inconsequential trading days to go.
By now everybody knows how Netflix got into this mess. There was the poorly received decision in July to begin charging subscribers on unlimited DVD rental plans for the now stand-alone streaming service. Three months later came the short-lived Qwikster fiasco. Now Netflix is projecting a loss in 2012 on global expansion costs and problematic stateside net cancellations.
This isn't the end for Netflix, but there are a few things that have to go right for Netflix to regain its winning ways in the coming year.
1. Netflix must end net cancellations
After closing out the third quarter with 800,000 fewer domestic subscribers, it wouldn't shock anyone to see Netflix take another step back during the current quarter.
The international numbers will continue to inch higher given Netflix's aggressive expansion plans, but Netflix needs to get its domestic house in order.
This could happen sooner than naysayers think. Members who were the angriest about Netflix's pricing change have largely moved on, but where did they go? Amazon.com (Nasdaq: AMZN) has a growing streaming catalog, but it doesn't offer discs. Coinstar's (Nasdaq: CSTR) Redbox and Dish Network's (Nasdaq: DISH) Blockbuster have strong retail DVD rentals, but lack realistic digital smorgasbords unless you happen to be a Dish satellite television subscriber. Before you argue that couch potatoes can just choose the service that matters the most, keep in mind that Netflix only raised prices for those who wanted both DVDs and streaming.
2. Netflix has to return to profitability sooner rather than later
Investors weren't happy when the former dot-com darling revealed that expanding into Ireland and the U.K. early next year will result in a quarterly deficit to kick off 2012. Then Netflix dropped the bombshell, letting investors know that it will likely post a loss for all of 2012.
That won't fly. If Netflix is able to stabilize its stateside operations and scale back its overseas expansion, a quicker return out of the red ink will help restore investor confidence.
3. Hastings needs to remind the market of Netflix's ability to shift gears
No one figured that Netflix -- the leader in DVD rentals by mail -- would be the leader in streaming. Hastings was smart enough to realize that if anyone was going to disrupt his flagship model it may as well be Netflix itself.
Why can't he do it again? What does Netflix lack?
New streaming releases? Yes, so why can't Netflix begin offering a la carte rentals of premium releases just as Apple (Nasdaq: AAPL), Amazon, and Blockbuster already do?
No video games? Netflix promised video games would be part of Qwikster, but seems to have abandoned the idea when it nixed Qwikster. Well, now that Blockbuster, Coinstar, and Gamefly are offering games, why can't it crash that party, too? Maybe teaming up with a killer brand that's absent here -- think GameStop (NYSE: GME) -- would help reduce the risk while tapping into GameStop's fluid and cheaply acquired pre-owned inventory.
As long as Netflix commands a sizable audience -- and it was a meaty 23.9 million global subscribers at last count -- any incremental business move will be relevant.
4. Netflix needs to shift to revenue-sharing streaming deals
Hastings has inked flat-rate multiyear deals to build up his company's digital vault. This is a strategy that has paid off as streaming growth has exploded, but now it's facing a cash crunch of chunky future obligations and the projected streaming growth is no longer there.
If studios are willing to play along, Netflix needs to begin brokering deals that will be guaranteed to be profitable because the content creators are sharing the revenue based on how many streams their titles are generating relative to Netflix's entire streaming activity. As the biggest game in digital streaming -- by far -- Netflix will still be able to offer studios more than they can find elsewhere. It needs to exploit that to make sure that its growing streaming business remains profitable even under flat or declining subscriber growth.
5. Hastings needs to come out of the gate strong in 2012
Company founders aren't well-liked and well-respected forever. Hastings has become a popular candidate for the year-end lists of 2011's worst CEOS. Yesterday afternoon Hastings made the cut on New York Times' DealBook's list.
It's a distinction that Hastings isn't used to. Hollywood and cable companies may have been enviously fearful of Netflix, but he was a rock star in the tech community and with investors.
The battering ram is getting louder, and there's little chance that Hastings will survive as CEO by the end of 2012 if the company doesn't get its act together. The sooner that he can silence the skeptics, the better.
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