At this point, Netflix just needs something, anything, for subscribers and investors to cheer.
For the past three months, Netflix managers have fumbled and bumbled their way into one controversy after another. They could help end the slump tomorrow when the Web's top video-rental service is due to report third-quarter earnings after the close of trading.
Much of the attention will be on the number of U.S. subscribers. Managers initially projected 25 million subscribers, but after announcing an unpopular price hike, they later lowered estimates to 24 million. Those figures may have taken another hit after CEO Reed Hastings announced two weeks before the quarter's end that he had decided tointo two separate services, a plan that was later canceled.
To meet financial expectations, Netflix must report quarterly revenue of around $800 million and a profit of about 94 cents a share, according to a poll of analysts by Thomson Reuters. Wall Street seems to be betting Netflix will make good. The company's shares closed trading on Friday up 5 percent to $117.04. A Netflix spokesman wasn't immediately available for comment.
If Netflix hits its numbers and offers a moderately rosy picture for the fourth quarter (remember, Hastings said in July that Netflix could see its), then Hastings could seize an opportunity to show that this is still a growth company and begin to silence his critics. It's hard to believe that Hastings, the man who and one of tech's marquee managers, is now fielding questions about whether he has considered resigning.
"Not for a second," Hastings recently told The New York Times. "I founded Netflix...I've built it steadily over 12 years now, first with DVD becoming profitable in 2002, a head-to-head ferocious battle with Blockbuster, and evolving the company toward streaming. This is the first time there have been material missteps. If you look at the cumulative track record, it's extremely positive."
The press and many of Hastings' customers turned on him after he decided to raise prices for a popular subscription plan and after he announced last month he would spin off DVD-by-mail operations into a separate service called Qwikster. It didn't help boost confidence much when he abruptlythree weeks later.
Hastings has said he considers Netflix to be like a pro-sports team, one where he will accept only the best players at every position. In that case, the performance this summer of his all stars was Red Sox-esque.
Boston's pro baseball team recorded one of the sport's worst collapses when it blew a nine-game lead with only 25 games left to play in a Wild Card race. The Red Sox, Hastings should note, now have a new manager. But here's how I think Hastings can avoid a similar fate as Terry Francona.
A huge lead
If Netflix reports 24 million U.S. subscribers for the third quarter, that will be 600,000 fewer than it reported for the second quarter. It will likely end a streak that saw the company add at least 1 million new customers in each of the past seven consecutive quarters.
But 24 million subscribers still represents a 42 percent increase from the 16.8 million subscribers the company reported for the same period in 2010. Not many CEOs would turn their noses up at growth like that.
In addition, none of Netflix's competitors is believed to be growing as fast, not Amazon, YouTube, the revamped Blockbuster, or Apple. At the moment, none of these services pose a significant threat. One reason for that is even at $16 a month, which is what Netflix charges for access to DVD-by-mail rental and unlimited streaming video, the service is a far better value than most rivals.
Stick to the game plan
Netflix seems to understand how it goofed; Hastings was hasty. He acknowledged this in his interview with the Times.
He told the paper the company "simply moved too quickly" on Qwikster. I would argue that there was a whiff of panic floating around the unveiling of the service.
Hastings introduced it as Netflix's stock spiraled downward and as large numbers of subscribers were canceling. Did Hastings flinch? Dennis Magner, president of Magner Sanborn, the ad firm hired to develop a logo and marketing campaign for Qwikster, told the Spokesman-Review he was surprised by Netflix's September 18 Qwikster announcement. He was led to believe that the DVD service wouldn't debut until weeks later.
Go back to fundamentals
Basic blocking and tackling for Netflix has always been about giving customers convenience, a broad selection and a low price. Netflix managers seem to understand they lost sight of that this summer.
Almost everybody in the know says the price hike was unavoidable, but Netflix implemented it at a time when the holes in the streaming selection were already starting to show. The perception was that Netflix was charging more and providing less. Netflix also wants to move people away from DVDs, but the action plan for that was misguided. Qwikster would have forced users to go to a new Web site, create new accounts and queues, and more important, get another bill.
Killing Qwikster is a sign that Hastings and staff are back on track.
The No. 1 priority now should be to obtain more streaming content. Scuttled licensing talks with Starz, the premium cable TV service was a setback. Starz owns the online distribution rights for Disney and Sony Pictures content. Netflix tried to downplay that by announcing a series of less important deals, including one with.
The amount of spin coming out of Netflix during the crisis period was also uncharacteristic. Netflix has ballyhooed TV deals with such providers as the CW Network and AMC. Sure, those move the ball but not everybody wants to invest time in a series. Netflix is known for films and all the TV content in the world is going to cover up their inability lately to obtain movie rights.
Hastings should remember his main battle won't be fought in the press. He will win or lose each time a subscriber logs on and looks for something to watch. Netflix either satisfies that desire or it doesn't.