Netflix Continues to Stumble from Blunders

By Maxwell Fisher - April 24, 2012 | Tickers: CMCSA, NFLX | 0 Comments

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It’s a common comedic shtick: Someone says something about a person and it turns out, that person is standing right behind them. A notable case of ‘open-mouth-insert-foot’ occurred yesterday when Netflix (NASDAQ: NFLX) Chief Executive Officer, Reed Hastings, opened up a can of worms about internet neutrality.

This Facebook rant against Comcast (NASDAQ: CMCSA) could backfire against the company. However it turns out, I do not see particularly good forecasts for either Comcast or Netflix.

What Has Happened

In the world of ‘My way – Right away’, few companies seem to be capitalizing on the desire to have things on demand. Those that have, benefited in recognition and revenue – those that aren’t.....well, let’s just say they have gone the way of Blockbuster.

I allude to the world of entertainment, where movies and TV on demand have become accepted and expected, though few companies seem to be paying attention. Most seem to focus on doing it quick as opposed to doing it right. Netflix in particular seemed to start well, then fumbled profusely and is still trying to pick up the pieces and get back in the game.

For all intents and purposes, Netflix should be a powerhouse. Its simple strategy of movies by mail, as many as you want for as long as you want, was the single stone that struck down the mighty Goliath Blockbuster. It was a cheaper, more efficient method of entertainment. More importantly, it gave power to the consumer. Your choice, delivered to you, no late fees. These pillars of customer service should have secured it a position of bulwark.

If that weren’t enough, the even easier method of streaming came into play. With the click of a button you had a library of movies at your fingertips, including TV shows and new releases. It quickly became the dominant force in video rentals. It even gave cable TV companies such as Comcast a run for their money, as now, consumers no longer had to pay for channels they didn’t want and the tedium of commercials before, between, and after.

So, how did Hastings bring down the company from the top? He mistakenly believed that consumers would accept a price increase without question simply because the company was offering a popular service at moderately low prices. In other words, walking away from customer rule number one, he assumed that the product was too important for people to walk away from. The move spelled disaster – a near 50% drop in stock value almost overnight.

Likewise, Comcast seems to be struggling with the decision of what business it wants to be in. Originally formed in the 1960’s under the name American Cable Systems, the company has since grown into the largest cable operator and home Internet service provider in the US.

However, it is also quickly evolving into a telephone service and home security provider. Normally, one would say such adaptability is good for a company. However, when one tries to do too much, it ends up losing all.

What Is Happening

It is important to look at current circumstances of both companies and the action (or lack thereof) both are taking. And oddly enough, one statement can accurately assess the two: It’s in some hot water over something it said and doesn’t seem to be doing much of anything to get out of it or direct attention elsewhere.

Back in 2006, Comcast struggled with customer complaints over its disrupting multiple protocols used by peer-to-peer file sharing networks and preventing users from uploading files. The company gave no justification for its actions. The following year, the Associated Press reported that Comcast "actively interferes with attempts by some of its high-speed Internet subscribers to share files online.” Thus began the issue of Network Neutrality that is Comcast’s current headache.

Tradition holds that all types of Net traffic should be considered equal. While there was speculation over the company’s obligation involving sending copyrighted material, the legal controversy was because instead of simple filtering content, Comcast purposely sent bogus packets to Comcast customers to disrupt the transfer.

The first lawsuit, Hart v. Comcast, was filed accusing Comcast of advertising unlimited high-speed Internet but actively restricting customers usage of the Internet. 2008 saw the opening of an FCC investigation. The ruling of the FCC stated that Comcast's network management was unreasonable and that Comcast must terminate the use of its discriminatory network management by the end of the year.

So what was Netflix’s blunder? If one recalls the anti-piracy legislation and all its recent variations (SOPA, PIPA, et al), one might also recall the certain supporters, one of which was Netflix. While the company tried to deny any direct support of the bill, it did announce the formation of its own political action committee called FLIXPAC. The agency would be able to endorse politicians which in turn could influence even more congressmen to condone increasingly controversial bills about piracy that are being and will be considered in the House and the Senate.

What Will Happen

Here we have two companies that should be on top of the market struggling to stay afloat. Both seem content to play out a ‘business as usual’ approach and offer no new service (or for that matter, better service).

On the contrary, both Apple (AAPL) and Amazon (AMZN) are rushing to fill the gap. Both companies are using a two-pronged approach; selling their own products while providing a streaming television service that the others are offering. This is a brilliant strategy and will likely result in more people forgetting Netflix and/or Comcast, buying an iPad, and getting it ‘all in one’.

It is also odd that while both Netflix and Comcast have grievously erred in the public’s mind, neither has attempted to apologize or change the conversation. With such a prideful and foolish approach to business, I see no evidence that either company will turn around until a leadership change forces action. Likewise, I see no leadership change without either company hitting such a low number as to rattle investors.

Summary

Netflix share price last year hit the $300 mark. Today it sits at less than half at $105. I predict shareholders will continue to suffer negative returns as the company rests on its laurels. Likewise, Comcast shares are trading around $30. I believe that its diffused focus across markets will prevent it from being competitive in any and will result in poor performance.

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