I have two childhood stories to relay to you.
When I was a kid, growing up on Weston Avenue in Niagara Falls, New York, we had cable, but my mother refused to pay for HBO. Back then, our cable company scrambled the signal of channels you did not subscribe to. I vividly recall peering through static and multi-colored, wavering bars to catch some glimpse of something during feature films ranging from Dangerous Liaisons to Meatballs.
From time to time, the cable guy would appear in our neighborhood to do work for somebody else. When he came down from the telephone pole, lo and behold, he had often made a mistake. Bingo. I felt like the luckiest guy in the world - we were getting free HBO! But, sooner or later, the cable company set things straight and we would get cut off.
There was, and still is, something truly "premium" about HBO, though I did not use that word to define the network back then. Companies throw the word "premium" around quite a bit these days.
A whole slew of publications, ranging from the Economist to the Omaha World-Herald, request that you pay extra for "premium content." Satellite radio provider Sirius XM (NASDAQ:SIRI) contends that it provides "premium channels." You can even customize your Sims gaming experience with "premium content." It's a bit like the overuse of the word "great" in relation to sports athletes.
And now, Netflix (NASDAQ:NFLX), the company that gives you an all-you-can-eat buffet, wants to be just like HBO. But, Netflix seems to think it can pull off, in a matter of months, what took HBO decades. It's likely time for Time Warner (NYSE:TWX) CEO Jeff Bewkes to get "sarcastic" again with Reed Hastings.
But, back to my childhood. When I wasn't beating my chest over
getting something really valuable for nothing, I was busy gaming Columbia House. You remember them, right? They still exist. Oddly, they're quietly trying (and probably failing) to compete with Netflix.
In my day, Columbia House would send you about 300 cassettes and, later, compact discs, if you taped a penny to a postage-paid postcard and mailed it back to them. I would send in a card for practically every member of my household and immediate family, including pets. Often, I would use the addresses of vacant homes to collect even more free music. My collection was huge.
When the bill came, you just laughed and threw it away. In a few months, Columbia House would send a debt collector after you. I rarely even opened those envelopes, rendering them almost immediate landfill. At least in my experience, and that of my friends, Columbia House never took legal action or dinged my credit.
Netflix, today, is what Columbia House was 20-25 years ago. The big difference, of course, is that you actually have to pay for Netflix, unless they throw you a freebie. But, at eight bucks a month, you're gaming Netflix, whether you do DVDs, streaming or both.
As the company effectively dissed its DVD customers, heavy users like my neighbor, Ginger, are probably the ones left standing. Ginger has two DVDs in the outgoing mail every other day. She's taking Netflix to the cleaners. Because Netflix does not give us this level of color, I can only speculate, but I reckon the ultra-profitable DVD customers (those who hardly used that side of the service) are gone, while leaches like Ginger remain.
And, all of a sudden, we're supposed to care and euphorically run the stock up on news that Netflix customers streamed 2 billion hours' worth of old movies, documentaries and re-run sitcoms in the fourth quarter. Where did that metric come from? And why wasn't it accompanied with news of subscriber growth? Because, as Needham noted Thursday morning, the only thing that can save NFLX, the stock, in 2012 is a spin on subscriber numbers:
Since Netflix has historically traded on its subscriber growth rate more than any other metric, such a move could potentially benefit the stock even if it translates into a loss in 2012.
Without any word from the company on the subscriber front to tag along with the streaming hours smoke and mirrors, I can only think the news will not be good when Netflix reports what was supposed to be a $1 billion fourth quarter on January 25th.
That's why Hastings continues to shift focus away from metrics that might actually mean something. He stopped talking about the virtuous cycle, revenue growth and profits a long time ago. Now, it appears he has little to say about what has always been his default in the event of Armageddon - subscriber growth.
And, now, what started at last month's UBS conference, continues with the announcement that Little Steven Van Zandt from the heartstopping, pants-dropping, houserocking, earth-shaking, booty-quaking, Viagra-taking, lovemaking, legendary E Street Band stars in another NFLX original series.
Like trying to slap lipstick on a pig, Netflix touts its Columbia House offering as HBO. That's not only an insult to the franchise that HBO spent years building, it's a slap in the face to investors.
This stock already ran once, real hard, on spin. It then fell, even harder, on reality. Don't let this move up fool you, it's very Research In Motion (RIMM)-like. The implosion has hardly even begun. On the bright side, soon, Netflix will no longer sport an over-inflated P/E ratio. It will just have to explain away its mounting losses.
Disclosure: I am short NFLX.
Additional disclosure: I am short NFLX via a long position in June $40 put options.