What can Netflix do?

The Netflix story just keeps getting worse. The stock is down 75% over it’s peak of around $300 in just a couple of months. Nothing could be worse for any company. It’s simply unbelievable but true!

 

They have indeed stumbled in trying to abruptly shift into a ‘not so well thought of’ strategy- the resulting missteps in communications over the splitting of the streaming & DVD businesses, the about turn on Qwikster and lack of a coherent PR campaign to get customers on their side have hurt them big- the current quarter’s subscriber churn by 800,000 shows.

 

There have been different analysis into what ails them- one of the most bearish is in this ‘bankruptcy is imminent‘ message- it is a pretty compelling outlook but I still think there is a logical way out- The root of their problems appears to lie in a 3 areas- Fixing these should take first priority

 

1) The over-reliance on the streaming business as a source of future growth- The movie streaming business is a good ticket to growth but it needs to be tempered with the right set of investments and the right levels of revenue. In other words- they need to slow down in expanding on streaming side investments. This includes the need to sign on additional expensive content licenses and enhancing the distribution further. An immediate freeze on on new deals and investments into distribution infrastructure for the next 6 months will serve them well. The DVD business should actually get more focus – that was how they got into the game in the first place.- if Redbox can churn out more DVD’s than ever why can’t Netflix?-it is going to take several years to see DVD’s going fully out of circulation.

 

2) The subscription model – While this worked on the DVD side of the house, it appears that this model is not at all suited to the streaming side of the business. At no point in time has Netflix sought to segment streaming products to attend to the needs of premium customers. This ‘all you can eat for one price’ model should simply go away. Instead create some new packages that can expand on subscription products- similar to what they have on the DVD side- ‘2 at a time’, ‘4 at a time’ etc. This might mean some loss in service functionality for some customers but will bring in more revenues overall. It just has to be marketed and communicated better – there are way too many customers who are upset today.

 

3) Last- listen to the customer- In the DVD business, the combination of user reviews on the site, suggested titles, the anticipation of the movie coming home on a weekend and the vastness of the title base (especially older titles that cost less) ensured a positive cycle of customer growth, customer advocacy and brand positioning. In the streaming business, they have abandoned all those good practices- queues are common across the household members, reviews are hard to get into( users have less incentive to post, since there is no need to go to the website anyways to create a queue), and titles are seemingly newer( more expensive).

In fact it just might be that a section of affluent customers will be more than keen to pay a 20 to 30% premium for newer titles. So that is an opportunity to create a new package.

 

Couple of days ago the stock was hovering at $100 with a P/E of 30. Today the P/E is at 19- which implies that the market is expecting a multiple of 19 over current earnings. Where will this multiple in growth come from? Certainly not from the current model.

 

Unless they make further changes rapidly on both the costs side of the business and the customer side for revenues, the business model is looking increasingly like that of an electric utility. Only thing with utilities, they own hard assets, like power girds etc- in the case of Netflix their real asset is the software and the distribution technology/ DVD warehouses over the internet- there is no play in the last mile( bandwidth into homes) or the first mile( i.e. the content is licensed).

 

In summary, I think there is still time and hope to undo some of the issues. There is not much in terms of competition out there but the longer they continue in the current mode, the bigger the opening for competition. Strategy is as much of choosing what not to do as well as what to do. All these actions can strengthen their position financially- which is the need of the hour. Netflix is a great service and it will be a pity to see them going down- one can only hope they get their act together and sharpen their focus on the customer.