The Agonizingly Slow Death of Netflix

I hope to someday soon to be brave enough to short a stock. For those unfamiliar with the term: when you short a stock, you earn money when the stock drops and lose money when it rises. Essentially, you are borrowing somebody else's share, and buying it back at a different price. So, if a stock is at $300 and you short it, then buy it back at $70, you have just made a tidy $230 profit.

Unlike the standard buy, this approach can be very risky. While the upside is limited by the current price of a stock (you can't drop below zero), the downside can quickly grow and cause significant losses if proper practices are not followed.

Due to the nature/ capital requirement to effectively short, I shy away from that realm. But some days it hurts when you opportunities you noted do come to fruition.

Netflix was one such opportunity for shorting. The company had dropped from a high of $300 in mid-July to an unsteady $120 in October. Yet, even $120 seemed expensive given a string of poor management decisions over at NFLX headquarters.

The string of notable mistakes began in the spring with the launch of an overhauled user interface(UI) which catered to console users while producing a frustrating experience for PC users. The "improved" UI redcuced efficiency by requiring additional hover-time and clicks to learn about movies and their ratings. Further, the UI introduced a seasickness effect that required users to browse rows that crawled across the screen and repeated without notification. These changes were accompanied by a blog post written by Reed Hastings which happily announced the change. Hasting's posting habits have become rather infamous with each Netflix decision.

The next falter in Netflix's stride occurred in mid-July with the announcement that prices would be increased. Amid the continuing complaints about the new UI the price increase amounted to a 50% increase for those who wished to continue to receive discs and stream from the internet ( fun fact: just a few months prior, customers had already accepted a $1.00 price increase  which amounted to about a 10% price increase at the time). The price increase was largely blamed on the cost of licensing rights and again accompanied by one of Hastings' missives. Again, the blog post attracted a massive amount of comments from the user base (largely criticizing the decision).

The final chapter, occurred when members received an email notifying them about the separation of Netflix into two services. Netflix would continue to stream movies via the internet and a new service entitled Kwikster would assume the role of DVD delivery. The excited tone of Hastings' "personal" email left many readers saying, "WTF" in unison. This final announcement was easily the largest failure of Netflix. The separation of key functions of the website into chunks unable to "talk with each other"(queues, ratings, reviews, etc.) was such an asinine idea, it makes me wonder if Hastings and the board even know what value the company provides. The Kwikster fiasco was swiftly shelved after immediate blowback from subscribers and investors.

That short case study ( likely soon to be a book by a departing president...) summarizes the reason for departure of some 800k subscribers and a $40 plunge in NFLX today. Too much, too fast, too little attention to the people that pay your bills.

Is Netflix finished. No, for many reasons. But, with such poor decisions over the past year, I no longer see a reason to believe NFLX will be the dominate player forever.


*Disclosure: I own zero Netflix stock.
** I also now know that I misspelled Qwikster. I don't care, it is a poor idea no matter how you spell it.
*** See also the speech Fry gives at the end of Futurama- Future Stock