Does this mean Reed Hastings won't be Microsoft's CEO?

Not long ago people speculated that Netflix's CEO, who is on Microsoft's board, might be on the short list to replace Steve Ballmer some day. Given Netflix's recent meltdown, however, if such a list existed, it's been crumpled up.

Rest easy Steve Ballmer.

All that speculation in June about how Microsoft should dump its CEO in favor of Netflix CEO Reed Hastings, who is a member of Microsoft's board of directors, was probably just talk. Regardless, if Hastings' name was on anyone's short list, he is an unlikely successor now.

Netflix CEO Reed Hastings participates in a 2009 Sundance Film Festival panel about the future of entertainment in the Digital Age. Michelle Meyers/CNET

As things stand, Hastings may not even be a lock as CEO of Netflix.

After a string of setbacks and missteps, Netflix delivered more bad news on Monday. The company is in need of cash. Netflix announced that the Web's top video rental service would raise $400 million by selling convertible notes and through a private placement. More worrisome still, the company also predicted a loss for 2012--after initially projecting a loss for only the first quarter.

On Tuesday, a day that saw Netflix's stock dip below $70, a new 52-week low, it's time we face some realities:

•  Hastings was considered a technology super brain just five months ago but his performance recently has left his position at Netflix to appear less secure.

•  The troubles that began for Netflix last July aren't isolated events and Netflix faces more lean periods for some time to come.

•  Netflix's streaming business doesn't look like a world beater any more. Unless more content frees up, the company appears headed for a future as the Web equivalent of the AMC channel.

I just got back from two weeks in Hollywood and my studio contacts predicted Netflix will carve out a profitable business offering TV reruns and back-catalog film titles on demand. Maybe, but that's a comedown. Part of what made Netflix so exciting was the company's potential, real or perceived, that it could revolutionize TV and film. For a while there, Netflix seemed poised to bring us all the shows and films we wanted for a super low price and to enable us to chainsaw those cable cords.

Reality has set in. There is just too much film and TV content that Netflix doesn't have access to because other distributors have locked it up. So, is an AMC for the Web worth getting excited about, or lofty stock valuations?

If Netflix is to carve out a better fate for itself, is Hastings' management team--and let's not forget the board of directors--the group that should lead it?

Back before July, there was no question about Hastings' leadership.

Hastings outmaneuvered the much larger Blockbuster. He reconstructed movie renting, not just once but twice; first with his DVD-by-mail operation and then by streaming movies and TV shows over the Web. He didn't walk on water but he was known for seeing around corners.

But during the past four months, his reputation has taken a beating. In July, the company badly botched the announcement of a price increase. As Netflix's stock price began to plummet following the price hike, Hastings appeared to panic. He abruptly announced the coming of Qwikster, a DVD-by-mail-only service that would be separate from the streaming service. Customers recoiled and Hastings appeared caught off-guard again by the negative reaction. Within weeks, Hastings killed the Qwikster plan.

On Monday, came the latest blow. Netflix needs to raise money. The worry is that Netflix cash problems could hobble growth. Sure, the company will have to put off overseas expansion, but Wall Street is also unsure whether Netflix can afford to build up its streaming-video library. Right now, that's the lifeblood of the company.

Without that, Netflix will struggle to keep existing customers happy or entice new ones, leaving the merchant with even less money to spend on content acquisition.

Why is Netflix short of cash? For one thing, content prices have gone up. Netflix has to pay $741 million for streaming content within a year and must plunk down more than $2 billion for streaming video deals that come due within one to three years. Another reason for the shortfall is the company's decision to buy back its own stock. Last year, Netflix managers authorized a $300 million stock buyback plan. Most of that money was spent on shares that cost far more than the stock is worth today.

So, managers made a bad deal and to be fair, there's no way they could have foreseen the recent troubles and the effects on the business. On the other hand, leaders should have known the price of content would go up and expenses from overseas expansion could be high.

So, in the wake of these questionable moves, it's not inconceivable for some Netflix investors to want a change in leadership. Hey, maybe they should see if Ballmer's happy.

 

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