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Netflix picks up pieces after recent miscues

Reed Hastings, CEO and founder of Netflix, appearing at the launch of Netflix in Colombia on Sept. 9, says the company’s missteps will be forgotten in three to five years. The big question will be, he said, “Did we succeed at streaming?”

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Reed Hastings, CEO and founder of Netflix, appearing at the launch of Netflix in Colombia on Sept. 9, says the company’s missteps will be forgotten in three to five years. The big question will be, he said, “Did we succeed at streaming?”

SAN FRANCISCO — To hear Netflix CEO Reed Hastings tell it, the boneheaded decisions that have dragged down the Internet's leading video subscription service during the past five months eventually will be forgotten like a bad movie made by a great director.

Shaking off the stigma of a massive flop won't be easy, a challenge Hastings acknowledged late Tuesday when he spoke at a UBS investor conference in New York. After his host mentioned the mystique surrounding Hastings as Net­flix's fortunes soared a year ago, Hastings quipped: "Now, it's just pity."

The self-deprecating humor prefaced a 45-minute treatise on why Hastings believes Netflix will overcome its recent adversity and remain at the forefront of a shift that increasingly will turn watching Internet-distributed video into one of the world's most popular pastimes. This coming as high-speed connections, mobile devices and more sophisticated televisions become commonplace.

His long-term vision calls for Netflix to be selling Internet video subscriptions at prices starting at $8 per month in most markets outside of China.

"If you fundamentally believe Internet video will change the world in 20 years, we are the leading play on that basis," Hastings boasted.

Hastings sounded like he intends to stick around to lead the way, despite questions about recent moves that triggered a customer backlash and a staggering decline in Netflix's stock price that wiped out three-fourths, or about $12.5 billion, of the company's market value in five months.

Hastings said his biggest mistake was trying to phase out Netflix's once-trailblazing DVD-by-mail rental service more quickly than millions of customers wanted. He and his management team concluded a few years ago that DVDs are destined to obsolescence, so they began concentrating on streaming video over high-speed Internet connections.

Ending Netflix's practice of bundling DVD-by-mail and Internet-streaming subscriptions together so people are forced to buy them separately was meant to push more households into weaning themselves from discs. Customers instead saw the move as a betrayal by a greedy company and canceled their subscriptions in droves.

"We berate ourselves tremendously for that lack of insight because it didn't need to be that way," Hastings said. "But, you know, in three or five years, we aren't going to remember it. It's going to be: 'Did we succeed at streaming?' "

There's damage to repair along the way.

Netflix entered October with 800,000 fewer U.S. subscribers than it had at the start of July, and the company has said there have been additional defections in the past two months.

The result: Netflix isn't bringing in as much money as it hoped to pay for an expansion in Latin America and Great Britain and cover rising fees to license movies and TV shows for its video-streaming library. The shortfall will saddle it with a loss next year, the first time that has happened in a decade.

Hastings said he expects Netflix to enjoy robust subscriber growth next year, with virtually all of the company's future growth to come from streaming-only subscriptions.

"DVD will do whatever it will do," Hastings said. "We are not going to hurt it, but we aren't putting a lot of time and energy into it."

Netflix ended September with 25.3 million subscribers worldwide, including 23.8 million in the U.S. Nearly 14 million of the U.S. subscriptions included a DVD-by-mail plan.

To ensure it will have enough money to finance its ambitions, Netflix recently raised $400 million by issuing convertible debt to one of its major stockholders and selling 2.86 million discounted shares. That stock sale further irritated investors because Netflix spent nearly $200 million buying back 900,000 shares of its stock at an average price of $218 during the first nine months of the year.

Hastings said Netflix probably could have gotten by without the extra money, but he decided to raise the extra cash to avoid a "crisis of confidence" among the company's suppliers, including movie and TV studios that license their video and sell their DVDs to the company.

Time line

Some key events involving Netflix since a backlash against it began over the summer:

July 12: Netflix Inc. says it will raise prices by as much as 60 percent for millions of subscribers who want to rent DVDs by mail and watch video on the Internet. The company decided to separate the two options so that subscribers who want both must buy separate plans totaling at least $16 per month. Netflix had been bundling both options in a single package starting at $10 per month.

Sept. 1: The price hike begins to take effect for existing customers. New customers had the new prices immediately.

Sept. 5: Netflix begins to offer its service in Latin America. Like its counterpart in Canada, the Latin American service is streaming-only, with no options for getting DVDs by mail.

Sept. 18: Netflix CEO Reed Hastings apologizes but keeps price hike in effect. Company creates more anger when it announces plans to split into two services — Netflix for the streaming, and Qwikster for the familiar discs in red envelopes. That means subscribers have to visit two websites to make movie requests and update billing information. Hastings says the two businesses have different cost structures and benefits, and splitting would let each grow independently.

Oct. 10: Netflix backs away from its plan to split its two services.

Oct. 24: The company discloses that it lost 800,000 U.S. subscribers in the July-September quarter, ending with 23.8 million. That loss is more than the 600,000 that Netflix had predicted.

Nov. 21: Netflix announces plans to raise $400 million by issuing debt and selling its stock. The move raises new fears about Netflix's financial strength as it girds for losses next year. It would be Netflix's first annual loss in a decade.

Dec. 6: Hastings appears before an investors' conference in New York, where he laments the company's recent mistakes but predicts they will be forgotten as Netflix's Internet video service continues to reshape the entertainment industry.

Stock price

On July 13:

$304.79

Wednesday's close:

$71.06

Drop:

76.7

percent

Netflix picks up pieces after recent miscues 12/07/11 [Last modified: Thursday, December 8, 2011 10:13pm]

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