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Netflix (NASDAQ:NFLX) can be so infuriating and no I don't mean the changes with pricing or with separating DVD from streaming to my home. I would love to be a shareholder of Netflix, but find I can't due to the management choices previously made, and likely to continue.

Choices that I cannot understand and obviously other management teams can't understand either. Did Netflix reinvent the content delivery model with DVDs? Yes, but that model is not only quickly changing, it is also quickly becoming a consensus we will likely witness the downfall of physical DVDs within the next 10 years. DVDs are a profit center for Netflix and it would be easy to understand how Netflix would likely go out of business if it wasn't for profits generated from mail order to keep the company afloat.

It doesn't have to be this way and everyone knows it except for maybe the management team. At one time the management team was hitting on all eight cylinders and could do no wrong. Even the move into streaming still appears to be the right one. At the same time it's looking more and more like they may be a one trick pony and the pony is quickly displaying age related wrinkles and a new shade of gray.

Netflix doesn't have to reinvent the wheel and the solution is almost as old as selling itself. Rule number one in sales, never decide how much the customer is able to spend, always let the customer decide. By offering a "one size fits all" model Netflix has essentially told the customers how much they are able to buy even if they may want to buy more. Who can possibly question the real fact that some customers would like the convenience of pay-per-view on Netflix if only it was available? If you can figure out where to restart a movie I was watching a few days ago and was interrupted so that I may begin where I left off surely you can figure out a way to bill my credit card for an extra movie I want to watch.

We don't need to look any further than Amazon (NASDAQ:AMZN) to know what Netflix is missing out on. Amazon made a name in the beginning for selling books online and creating a new way for webmasters to make money with its then new "affiliate program." Now Amazon is into almost everything and the PE ratio demonstrates Amazon's adaptability very clearly. Amazon is trading for a brain twisting 75 PE ratio while Netflix trades near half at 40.

What Amazon does and Netflix should:

Amazon

Netflix

Offers a subscription for service

X

X

Offers a premium level

X

Sells Ads

X

Allows others to sell related products

X

Sells movies

X

Sells songs

X

If the Netflix Board of Directors made me CEO here is what I would do:

  • Continue to offer the current service ad free.
  • Offer the current service at a lower price with ads.
  • Tier the service offerings to allow a premium level subscription with greater access to content.
  • Make it one point and click to order and receive in the mail any movie on Netflix.
  • Allow subscribers buy and sell their used moves on Netflix. There is over 20 million views with Netflix. One would have to believe they have enough to create the ecosystem. Why send these people to other places like eBay (NASDAQ:EBAY) and Amazon?
  • Offer pay per view as described earlier.
  • Offer one or more premium level non-kid friendly type of content.
  • Create ad partnerships with device venders. People watching Netflix would likely want to know what TVs are available that can directly hook up to the Internet. How many millions in ad revenue is left on the table because management currently refuses to let shareholders monetize the massive traffic on the website?

It's time shareholders stood up and demanded more out of management. The current circus of trying to be the cheapest with lowering levels of content will only last so long. Amazon in no small way has sent a shot over the bow. Apple (NASDAQ:AAPL) has largely followed the "upsell" model with content delivery. One can order HBO moves like Band of Brothers and Entourage on Apple and Amazon, but Netflix continues to coast along on previous successes. Apple only needs to decide it wants to become the leader in the space and aggressively go after it to make the last few reporting quarters by Netflix look like a dream shareholders wish they could have back.

Fellow contributor Rocco Pendola is holding June $40 put options for Netflix. We have both shared bearish sentiments, but Rocco's timing was much better than mine. We both agree Netflix must change the plan or change the management (in order to change the plan). Where we disagree is I believe selling credit bear spreads is a better approach. I want to be bullish with Netflix because I can see the potential. At the same time it doesn't appear anyone driving the ship wants to set a course of profit. This leads me to a credit bear spread because I may collect premium from bulls while protecting myself in case a new direction is announced. Like Rocco I like the June month as an expiration date, but I prefer to sell the $110 call for about $12 and hedge it with a $130 call for about $3.40. This spread will raise about $8.60 in premium and leave me with a potential loss of about $11.40. As long as NFLX closes out on option expiration day in June for less than $118.60 I make money on the trade.

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

Source: Netflix Needs To Change The Plan Or Change The Leadership