Jenga is not a game that should be used as a model for running a business, especially a consumer-oriented entertainment venture. A proper strategy for building a business is the opposite of Jenga: Offer a solid product, then slowly build on its strong foundation, an ever-climbing structure that grows in value at the same time as it does in scale. It’s not smart to removing multiple pieces from your foundation without replacing them, watching a sturdy tower start to sway under the pressure of losing its base.
Netflix (NASDAQ:NFLX) is not by any means a tower about to fall, but if the company removes any more from its streaming service, the foundation of its monumental success over the past three years, it’s going to start to sway. Now that it has taken away users’ ability to watch multiple streams at once on the same account, Netflix looks a touch unstable.
To investors, the home video company already was on shaky ground. Share prices in Netflix have plummeted since July, shedding almost a third of their value in the fall from $304 to just above $214 on Wednesday. The company’s initial decline came after tens of thousands of subscribers decried Netflix’s plans to alter subscription pricing so streaming and by-mail DVD rentals had to be purchased separately. It took another hit on Friday after contract negotiations with Starz — the Liberty Media-owned (NASDAQ:LSTZA) premium cable movie channel — broke down, leaving Netflix without guaranteed access to many Disney (NYSE:DIS) and Sony (NYSE:SNE) films in 2012.
While shares showed some signs of recovery on Tuesday, word through website Stop the Cap that the company had altered its Terms of Service agreement to limit the number of streams users can watch on the same account appears to have kept investor confidence low. Netflix hasn’t actively prevented users from watching multiple streams on the same account — for example, one on a living room television and another on a laptop in another room — in the past even though it has used messages on streams to discourage it. Now Netflix users must purchase multiple-stream subscription packages much as they’ve had to pay extra for additional DVD rentals. Any attempts to watch more are blocked entirely.
Investors following the recent drama of Netflix’s subscription metamorphosis might recognize this change in structure as being heralded in the company’s testing of “Family Plan” subscription packages, a model that seemed promising when first hinted at in April. The family plan pricing model as suggested at the time, however, suggested Netflix also would offer a wider array of content at the same time as offering multiple streams via a single account. This new policy, one unpublicized by the company, offers nothing to subscribers to replace any lost value in the change. Bad business no matter what way it’s looked at.
With the rapid rise in popularity of Netflix’s streaming service came a rapid rise in content provider dissatisfaction. The companies providing movies and television shows to Netflix felt they weren’t getting enough for their wares, and changes to Netflix’s pricing were inevitable as a result. Limiting the number of streams users have access to at the same time as doubling the cost of maintaining a streaming subscription and a by-mail subscription — without introducing new content — might be too much change too fast for Netflix. From here on out, it might only take one false move to make the tower crumble.
As of this writing, Anthony John Agnello did not own a position in any of the stocks named here. Follow him on Twitter at @ajohnagnello and become a fan of InvestorPlace on Facebook.
