The news continues to worsen at Netflix. I have been tracking this company since its ill-fated decision back in July to unilaterally change a winning formula. As a reminder, for the past few years Netflix had been one of the hottest stocks to own. The stock soared nearly 900% between January 1, 2009 and July 14, 2011. Then in July Netflix shocked its loyal customer base with a complete change in strategy when it announced it was splitting its unlimited streaming and unlimited DVD-by-mail plan into two separate services. Customers who wanted to keep both services would need two accounts and would see a 60% price increase. The speed and ferocity of the backlash was unprecedented. Research predicted a mass exodus of customers and Netflix was forced to revise downward its third quarter estimates. Between August 8 and September 19 Netflix stock plunged from a high of $298 a share to just $128 a share. This 57% decrease in value represents a loss of nearly $9 Billion in market capitalization in just two months. On September 18, 2011 Netflix CEO Reed Hastings attempted to calm customer anger with a blog post that started with the following: "I messed up. I owe everyone an explanation." October 10 the company announced a 180 degree reversal in strategy stating that it was dropping its plan to split and re-brand its DVD service which would have forced customers to maintain two separate accounts. Qwikster died a quick death. The 60% price increase for both services, however, was not changed. Company executives no doubt hoped (or should I say prayed) that this "mea culpa" would stem the bleeding. Unfortunately, they were wrong.
On Monday, Netflix announced its third quarter results which revealed the damage from the ill-fated strategy change. Netflix ended the third quarter with 800,000 fewer subscribers in the United States. This was the first decline in years. Despite the decline in subscribers, the company reported net income of $62.5 million, or $1.16, a share, compared with $38 million, or 70 cents a share, in the year-earlier quarter. Revenue rose 49 percent to $822 million. Both revenue and income topped analysts’ expectations. How did the market respond to the news that Netflix topped its financial estimates? With a blood bath. So far today the stock is down over $40 to just $78 a share! This is a 34% drop in one day. Why the plunge on good financial results? Because Netflix also reported it expects to lose more customers in the fourth quarter. It also forecasts potential losses in 2012 because of costs to expand its services into the U.K. and Ireland. Analysts are downgrading the stock and people are wondering just how low Netflix will go. Since this debacle began, Netflix stock fell 74% from a high of $298 a share to just $78 a share. Put another way, a few months ago Netflix had a market capitalization of $15.7 Billion. Today this company has a market capitalization of $4.1 Billion. Over $11.5 Billion in market capitalization has been lost. A lot of this pain could have been avoided if Netflix had surveyed its customers in the spring to gauge their reaction to this product line change. A TechWise Market Model study, our custom approach to conjoint research, would have predicted customer preference for different pricing scenarios allowing Netflix to make an informed decision as to how much it could raise its price without creating customer backlash.
Netflix fall from grace is so stunning that it warrants continued tracking. One wonders how soon this will be turned into a case review that will be debated by Harvard Business School students. My intention on following Netflix so closely is not to "beat a dead horse". Unfortunately, any investors who bought this stock between January 2010 and June 2011 may feel exactly this way.