All those interested in a career in public relations need not look any further than the current maelstrom that surrounds Netflix (NASDAQ:NFLX) and its decision to split its video streaming and DVD rentals into two separate services. The backlash has been severe, with its stock falling 50% in just two months. Speculation is rampant that this provides an opening for Google (NASDAQ:GOOG) or Amazon (NASDAQ:AMZN) to acquire Netflix, and the chatter so far has kept its stock price from plummeting further.
With intense competition on the horizon, expect the downward spiral to accelerate below the $100 mark. The Wall Street darling’s reign is over, and it’s not coming back. Here’s why.
On the surface, I can understand Netflix’s decision to split the two services. The DVD business — while the girl that brought you to the dance — is low-margin and painstakingly boring; the streaming business is oh-so-now and high-margin.
Also, Hollywood content providers are putting the screws to digital streamers like Netflix by requiring a fee per user per month. When you have 24.6 million subscribers, it gets expensive fast. Netflix didn’t want to pay for all its subscribers when only a percentage of them were actually streaming. It had two choices: either continue negotiating on a flat yearly fee for the right to distribute content, or split them up. It chose the latter.
From a business perspective, that makes a lot of sense. What doesn’t make sense is its decision to up the monthly fee of $9.99 for both to $15.98. That’s a 60% increase. At a time when America is reeling, the arrogance of such a move is palpable, and trying to brush the increase under the rug with a sin of omission is even worse. Reed Hastings might have been a good CEO at one time, but no longer. Netflix’s move has both angered its loyal customer base and re-energized its competition in both businesses. According to research firm Frank N. Magid Associates, up to 7.4 million of its users still are seriously considering canceling their subscriptions. Talk about jeopardizing the goose that laid the golden egg.