Why Springsteen Might Save Netflix

| About: Netflix, Inc. (NFLX)

If you obsess over the stock market, or anything else for that matter, it pays to read things in seemingly disparate areas. Not only does this make you a more well-rounded human, but it often informs your obsessions.

As I was leafing through the pages of Rolling Stone (actually, I saw it on the Internet via Twitter), I came across the following, excerpted from an interview with Bruce Springsteen and The E Street Band guitarist and the star of Netflix's (NASDAQ:NFLX) Lilyhammer, Little Steven Van Zandt:

RS: Are they already planning a second season?

LS: Yeah, there's discussions about it. Netflix wants it. But I've got this other little logistical problem called the Bruce Springsteen tour. I gotta see how the hell I can do this. If we wait until the end of the tour to film it, we're talking 2014 for season two. And that seems a bit long to wait. So I'm gonna try and figure this out. We have to first determine whether America really likes it or not. We'll go from there.

Within the E Street family, it's always been like this - when Bruce calls, you drop everything and come. It goes that way for band members, who have had obligations ranging from band leader on late night telly-vision to star of The Sorpanos. Same for ardent fans. When Bruce announces a tour, you tap the reserve funds and get as many shows as possible on your schedule (On that note, I need a GA for Buffalo).

That's just the way it works when you become enraptured by the power and the glory, the promise, the majesty, the mystery, the ministry of rock-n-roll.

But, what does this all mean for investors with an eye on NFLX? Quite a bit, I reckon.

First, yet again, somebody else breaks Netflix's news before Netflix does. The company "wants" another season of Lilyhammer. Given that Netflix has all but said that it wants to be the next HBO, this is important. This, not surprisingly, is all in stark contrast to what Netflix CEO Reed Hastings had to say about HBO and original programming in June of last year:

As far as original content, what we want is prior season for all the big shows. We have some Showtime, we'd like to get HBO.

But back to our "House of Cards" show with Kevin Spacey. We're not producing it, we're licensing it. Really, we'd like to spend that money on Showtime and HBO shows, but they're not taking it yet. So we're doing this instead.

HBO won't take our checks yet, because they're not big enough. But we'll get there ...

We'll do a few things. Serialized shows, where you can go back and catch old shows, those are good for us.

Textbook Hastings. Six months ago the guy positions his company as HBO's (expletive) and now, all of a sudden, they're peers, about to tangle in fierce competition, but with the utmost respect for one another. I can hear Time Warner (NYSE:TWX) CEO Jeff Bewkes laughing at that one from here.

If you want Netflix to somehow succeed and exist as a company two years now, you can only hope that this little Springsteen logistical hitch makes Hastings stop and think.

As much as I adore Van Zandt (and the show might be excellent), Lilyhammer, as structured, was an awful idea. First off, why in the world would you provide all eight episodes at once? There's no good reason to do that. I know diehard Springsteen fans who will subscribe, get their fill of Little Steve and then ditch the service. That will take some folks about eight hours.

Second, you provide your subscribers with original programming - which HBO and Showtime have made synonymous with quality - for $8 a month! This is one of the major reasons content creators will not sell Netflix premium content. If it's on Netflix, it's been diluted and rendered to the bargain rack. It loses practically all value. That's why Starz (NASDAQ:LMCA) dumped Netflix. It's also why CBS (NYSE:CBS) openly states that it only provides content it can no longer monetize with advertisers to middlemen like Netflix.

In a nutshell, by charging just $8 a month, Netflix effectively says to the world, this is not worth much. It would be a completely different story if they sold meaningful ad time against the show, but there's likely not an agency in its right mind that would do a deal.

Yet, according to Van Zandt, Netflix wants season number two. Maybe if The E Street Band gets in the way, Hastings will take a pause and rethink this errant and misguided strategy. Maybe he'll pull a chair in front of his Macbook, open up Wordpress and create an entry on the stream of consciousness known as the Netflix blog:

I messed up. I owe everyone an apology.

It is clear from the feedback on Facebook that we need to change course ... again. Original programming is a bad idea. It costs a lot of money. And it's really difficult to get something good produced. You know, comparable to the rest of our streaming lineup, which includes everything the CW has ever done and classic films like Top Gun.

As such,we are setting up a dedicated DVD division, led by 12-year Netflix veteran Andy Rendich, to focus on running a successful DVD by mail service in the U.S. for a long time. Andy and his team will be located nearby in San Jose, and are already planning some great improvements for the DVD service. Because we believe we can best generate profits and satisfaction by keeping DVD by mail as a division, we have no intention of selling it. In Q4, we'll also return to marketing our DVD by mail service, something we haven't done for many quarters. Our goal is to keep DVD as healthy as possible for as many years as possible.

*(The preceding is a parody. While Reed Hastings has actually said some of the things quoted in that passage, I put together the vignette to help make a point.)

As I watch this disaster in progress, I become more convinced every single day that Netflix can only survive if it reverses course - again - and does what it said it was going to do last summer - refocus on the DVD. If you want to dominate streaming, produce original programming and expand internationally, you need money. Lots of it. Netflix does not have lots of money, plus it has plenty of bills to pay over the next five years. And, even if subscriber growth never slowed, there was never a chance in the world that new subscribers could fund exponentially rising expenses. I beat that drum to death throughout 2011.

The price increase was nothing. Qwikster paled in comparison. The dumbest move a corporate executive has made in a long while is killing a high-margin business that subsidized an emerging, but low-margin business for no good reason. Good companies use cash cows. They milk them for all they're worth to fund the future. I simply cannot understand what the thinking is over there.

Last year, at around this time, I advocated buying puts on NFLX. Of course, the stock proceeded to soar to all-time highs. Shortly after the run, I was vindicated. I think we're in for a repeat of history in 2012, minus the all-time high. The big difference this year, don't be bearish NFLX without hedging your bet.

Disclosure: I am long TWX.

Additional disclosure: I am long NFLX June $40 put options.