Time for Netflix's Hastings to exit the spotlightOctober 12, 2012: 11:47 AM ET
Few people are as well-equipped to navigate the uncertainty of the home-video market as well as Reed Hastings. But he should probably refrain from dealing directly with customers.
FORTUNE -- A new book about Netflix -- Gina Keating's Netflixed -- portrays CEO Reed Hastings as a numbers nerd somewhat lacking in people skills and as a bit of a bumbler when it comes to communicating with customers. That would help explain his mishandling of the company's announcement last year of pricing changes that amounted to increases of up to 60%, and his subsequent announcement, quickly withdrawn, that he planned to split the company in two -- Netflix for streaming and a new company, Qwikster, for DVD rentals. Customers rebelled, and the company is still dealing with the fallout 15 months later
Few doubt Hastings' business acumen or his insights into the video market, but with the increasing challenges and uncertainties the company is facing over the next few years, Netflix (NFLX) must focus much more heavily on customers and service. Rocco Pendola of TheStreet.com has recommended that Netflix hire a celebrity spokesperson to handle all such future announcements. And he recommends that the celeb's first task should be to announce a price increase.
The celebrity spokesperson probably isn't necessary, but a price increase almost certainly will be. If the company simply informs customers via email, that should be sufficient. If it had done so last year, sans all the Hastings weirdness, it would have almost certainly gone over better, and the company's stock might not have dropped so precipitously - from about $300 in July of last year to about $64 now -- a loss of more than 75%. (Hastings was Fortune's Business Person of the Year in 2010.)
The stock would likely have fallen anyway (though by how much is anyone's guess) for a lot of reasons. The chief one being that the sweet licensing deals Netflix had struck with studios have been expiring. New deals, when they can even be struck, are much pricier. Margins are quickly narrowing, and customers are still paying a ridiculously low $8 a month for all the videos they can watch. At the same time, competition is heating up from the likes of Amazon (AMZN), Apple (AAPL), Redbox (CSTR), and Hulu, not to mention the cable and satellite companies.
The uncertainty is revealed in the wildly varying prognostications of Wall Street analysts. Mark Mahoney of Citi (C) recently reiterated a "buy" recommendation with a price target of $120. He noted that customer satisfaction improved in August for the first time since what he calls last years "Apocaflix." And Yousef Squali of Cantor Fitzgerald believes that margins will be further squeezed in the short-term, but in the intermediate and long terms, revenue growth and new subscriptions will outpace licensing costs as Netflix stakes new international markets.
But expanding overseas will cost, notes Brian Fitzgerald of Jeffries & Co. Netflix, he says, will have to plow "all" near term profits into international growth, where he says streaming is, at least for now "unprofitable." Bank of America's (BAC) Nat Schindler downgraded the shares this week after having upgraded them in August. (The reconsideration came after a short-term spike in the share price over six trading days, roaring from $54.44 to $73.93 on Monday.) Schindler, too, is concerned about the costs of overseas expansion and the uncertain profitability of streaming.
The shift away from DVDs and toward streaming will hurt profits across the board, since streaming yields considerably narrower margins. The company has no choice but to follow its customers' desires, and indeed that was what Hastings was trying to do with Qwikster. He might have been premature and clumsy about it, but he wasn't wrong conceptually. The company will release its third-quarter results on October 23.
Keating told Fortune this week that "everything is a bit cloudy right now," but that if anyone can see through the fog, it's Hastings. Poor people skills or not, "I would always bet on Reed Hastings after watching him for seven years," she said. "He just has a really tremendous vision for what people want because they have 15 years of data they have collected with their website which is basically a market research platform." But Hastings should probably leave the announcements to his spokespeople.