Netflix's Classic Mistake Is Irreversible And Life-Threatening

Oct. 26, 2011 10:11 PM ETNetflix, Inc. (NFLX)BLOAQ, IP15 Comments
John Tobey, CFA profile picture
John Tobey, CFA

Netflix (NASDAQ:NFLX) management tried to do the right thing, but they implemented their strategy incorrectly. Unfortunately, their classic mistake cannot be rectified. Worse, because Netflix is non-diversified, the costly error could put it on a course similar to Blockbuster (OTC:BLOAQ).

Blockbuster stock chart

(Stock charts courtesy of

Photo of jump off cliffHere’s how they botched the company’s fabulous opportunity. (I am using a case example I know well to illustrate what went wrong.)

The problem/opportunity: A market shift from physical to electronic

In the mid-1970s, paper companies were trying to strategize how they would fit into the coming “paperless” economy. Electronic data storage was spreading, computer time-sharing was popular and Xerox Palo Alto Research Center (PARC) was developing the Ethernet. It was only a matter of time (it was thought) that paper usage in offices would decline.

For Netflix, the shift is similar: from physical video DVDs to electronic video streaming. With increasing broadband/speed, improved software and expanding content, it is only a matter of time (it is thought) that DVD usage in homes will decline.

The need: A company shift in direction

At International Paper (IP), where I was working, a major consulting firm was aiding management and developing a picture of where the company was and where it needed to head. The approach was twofold: First, to modernize by focusing on profitable growth areas (more about that later); and, second, to diversify (IP created IP Credit, which would become a major leasing firm, and they acquired General Crude as a non-paper, natural resource holding).

Netflix management responded quickly to its market shift, expanding its DVD rental business model to include video streaming. It makes sense: The same customer base dealing with the same firm, fulfilling the same need, but in a different format. (Blockbuster, with its physical retail locations, did not have the flexibility to make such market shift moves.)

This article was written by

John Tobey, CFA profile picture
I am the founder and editor of Investment Directions. My career has been managing and consulting to multi-billion dollar funds. Using the widely accepted “multi-manager” approach, I have worked with top investment managers throughout the country, gaining a high level of expertise. My career has spanned many market environments, and I have hands-on experience searching out opportunities and avoiding risks in all of them. I now devote my time to Investment Directions, with the goal of helping investors further their understanding and improve their investing skills. I am currently serving on: The AAUW Investment Advisers Committee and The City of Vista Investment Advisory Committee.

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