Something happened the other day that put me between a rock and a hard place. I received the following Tweet:
The name rang a bell so the first thing I did was hit Wikipedia. That led me to an April 2011 edition of Jon Stewart's Daily Show. Alright, this guy's a big deal. I then went ahead and read his Netflix (NFLX) Vanity Fair article.
Well-written, it starts off with a recap of Netflix CEO Reed Hastings' 2011 stumbles and his subsequent attempts to explain and conduct damage control. Because I had no idea this article was coming, I was not prepared for what would hit just after Cohan ran down quotes from big-time Hollywood executives heaping praise on Hastings:
All of this praise is simply too much for Rocco Pendola, one of the most outspoken "shorts" on Netflix's stock, who unleashed a November 28 tirade against the company on the Seeking Alpha blog. Pendola had been reading Haruki Murakami's latest book, 1Q84, and he concluded that, like Aomame, the main character in the novel, "I must be living my own reality separate from (Netflix) bulls." He wrote that he could not understand why, despite the separation fiasco and the near collapse of the stock, any number of publications and research analysts were still trumpeting Netflix as an investment. "Simply put, these moves that Reed Hastings made represent nothing more than desperate reactions to a broken business model," he wrote.
After letting me in on something I did not know - I idolize NFLX bear and Janney Montgomery analyst Tony Wible - Cohan goes on to note:
... following a better-than-expected fourth-quarter 2011 earnings announcement ... Netflix's stock has rebounded to around $124 per share. The bears remain incredulous. "What we have here is a momentum stock divorced from its underlying company's reality," Pendola wrote January 27 on the Seeking Alpha blog. "It would not shock me in the least to see (Netflix) move on air back to $300 a share before its next earnings report. At some point, however, the same thing that happened in 2011- a full-on implosion - will take shape sooner, rather than later." Added Wible, in a recent e-mail, "Seems like we are back to 2010 again."
I agree with my "hero" Wible.
Speaking of the rock and a hard place ... I will be flat out honest here. It's sort of tough to get mentioned by Vanity Fair in a NFLX article the day after you said you would never write about NFLX on Seeking Alpha again and then proceed to not mention NFLX again. As people who read my stuff even a little bit know, I love to toot my own horn - who doesn't? - but I am the first to admit mistakes, call myself an idiot and, hopefully, show humility. At least that's what I strive for as a writer and a human.
I am certainly not going to compare what I do to epic historical events or the plight of Gandhi.
Not only do I want to pat myself on the back, but I think the VF article is worth your time, plus I owe Cohan as big a public thanks as I can muster for the mention. The only beef I have with Cohan's article is the same one I have with most analyses of Netflix. In parts, it focuses on the price increase and Qwikster as the things that started Netflix's troubles. That's what Hastings wants people to think. In reality, those moves were misguided answers to the endemic problem of Netflix's broken business model. But, I digress ...
So I broke my promise. Give me a mulligan. I promise. This is it. Plus, my article from the other day and Cohan's piece got me thinking more about what I said about Hastings. And I meant this sincerely:
Hastings is a brilliant man. If you do not think that he is, you're being bias. Today, DVD-by-mail is an afterthought. It's only an afterthought, however, because Hastings hatched it on the way back from the gym after returning an overdue movie while the rest of us were stuffing our faces with Cheetos. The man had an incredible, ground-breaking, game-changing idea. And he still has an impressive knack for visioning the future. All of that talk about smart and social TV and targeted advertising - he knows how it will look before we think of it and before it happens. He plants the seeds. We act like we knew all along. It's as simple as that.
Seriously. Hastings pocketed $75 million when he sold a software company before he ate breakfast and invented Netflix. That's bow-worthy material where I come from. And, as Jerry once said to George on Seinfeld, "We come from the same place!" Forget what he did before Netflix. He invented the red envelope. DVD-by-mail. The rest of us are pretty much inferior beings. Just face it. And I say this with a 100% straight face and the seriousness of a really bad paper cut.
Something other than Netflix's inherently bad business model, 2011 "blunders" and absolutely awful strategic-competitive position sits at the core of its problem. It could somehow shovel its way out of this mess, but it would take a drastic paradigm shift. I do not mean give up on streaming or even the dream of original programming. Rather, I mean start running the business well in the short-term as to not shoot a hole in the long-term.
Consider Mark Zuckerberg at Facebook (FB). Here's somebody I call a "punk kid" with a huge smirk on my face and no seriousness whatsoever. Zuckerberg represents another guy who changed the world and, in the process, renders the rest of us slobs mere mortals. A recent piece in the Guardian gets it all wrong:
But now that it (Facebook) is coming to the market, Zuckerberg's role is set to come under increasing scrutiny. The needs of a startup - even a huge one - are very different from those of a fully grown corporate behemoth with a floating stock price and outside investors clamoring for returns at all costs.Some see Zuckerberg as less well equipped to tackle those demands as chief executive than current chief operating officer, Sheryl Sandberg, who has a strong business background and is the company's highest-paid employee. They see Zuckerberg as more of a visionary and a creative force, while Sandberg as the real business brain.
First off, the author needs to study up on the history and present status of Apple (AAPL) and Amazon.com (AMZN). Both firms are perpetual start-ups with incredible visionaries who made each business the dominant force it is today. I suggest Adam Lashinky's excellent Inside Apple and the sources he cites on the topic in that book as starters.
Some of the best companies run in perpetual start-up mode. As is the case at Apple and Amazon, however, these firms do not gun-sling recklessly. They have corporate structures. You can see Amazon's a bit more clearly than the ultra-secretive Apple's, but, at day's end, Apple and Amazon rarely, if ever, expose the world to the boring business that runs inside the exciting and dynamic one. But, make no mistake about it, that boring business - guided by many IBM (IBM)-type alumni at Apple over the years - exists and deserves as much credit for each firm's success as the mysterious and/or flashy.
That's exactly the genius move Zuckerberg is making, for whatever reason, at Facebook. Sandberg is hardly a figurehead. Read a bit about her. She is a strong and capable COO. And she will ensure that Zuckerberg's lofty, higher-level and big picture visions do not derail the things that need to take place in the short-term so that Facebook does not sacrifice its long-term.
That's exactly what Reed Hastings needs. He needs a Sheryl Sandberg to save him from his unbelievably brilliant self.
Disclosure: I am long AAPL.
Additional disclosure: I am long NFLX June $40 put options.