Netflix: Beginning Of The End Or End Of The Beginning?

Sep.20.11 | About: Netflix, Inc. (NFLX)

In the beginning there was Netflix (NASDAQ:NFLX) and it was good. In fact it was real good. So good that in 2010, Netflix began climbing. And Climbing. And Climbing.

Netflix had a great business model. Have customers subscribe for a fixed fee to receive DVDs by mail. Customers loved it. Then it offered a DVD queue. Allow customers to put movies on queue so that after they return one movie, a second is automatically delivered. Customers Loved it.

Downloadable and Instant available content came on board and the stock took off. Not only did customers love it but so did the investors.

$50, $100, $150, $200, $250, NFLX was moving faster and faster with every day that passed. If ever there was a stock with some serious momentum it was this one. And then on July 12, 2011, the company did the worst thing it could have possibly done. On that day the company said it would be charging customers individually for Streaming access and DVDs by Mail. Outrage ensued.

Why should they split it up?

For me the answer seems obvious, they needed the growth. Sure the company kept adding market share by obtaining new household subscriptions but at some point that growth was going to dissipate and earnings growth would need to come from a new source. That source: a price increase. The company didn't want to outrage clients by charging more in an outright fashion, so instead it gave customers the choice. We'll charge you more, but if you like, we'll give you the option of which services you'd like to subscribe to.

Bad move. Everyone loved having both services and now they are required to pay more altogether or else give one of them up. Disgruntled though they were, customers were willing to pay both fees and maintain their current service.

Then Netflix made a move that may have left itself open to a checkmate. The company announced that it would split the two divisions into 2 companies. Netflix would remain as the streaming service, and Qwikster would become the DVD by mail service.

Side Note: QWIKSTER??? Is this supposed to be a knock off of Friendster or Napster or any other late 90s, early 2000s internet dot com?

How does this change affect customers? By having two separate companies run each division, customers now will have to manage two separate movie queues on two separate websites. Customers will also need to submit credit card information and other subscription information on the new site. I can't speak for the entire customer base, however I am pretty positive that there will be few customers willing to deal with this hassle.

Why support a company that has raised the prices on its service, has less content now that Sony has pulled its contract, and changed the service to be inconvenient to you? I wouldn't. If I want a DVD, I'll go to a Redbox run by Coinstar (NASDAQ:CSTR) and rent a movie for a dollar. If I need streaming content I'll use (NASDAQ:AMZN) and HULU [owned by NBC, which is owned by Comcast (NASDAQ:CMCSA) and General Electric (NYSE:GE)].

If Netflix executives think that they will be able to sell off the DVD by mail company (I refuse to use the name Qwikster) they are only fooling themselves. No one will be willing to pay for a service that will be as extinct as the dinosaurs in a few years.

What's next? Is Netflix going to start posting banner ads on the downloadable content? Or maybe it'll add commercials to movies?

I don't see NFLX going away entirely. With the stock at $151/share it may seem like a bargain down from its 52-week high of $304.59, but in my opinion I would be avoiding it like the black plague.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.