Netflix: Weathering A Storm Or Causing A Tempest In A Teacup?
Just as dumb companies do not turn innovative overnight, innovative and smart companies don't turn dumb suddenly. Past performance is generally a good indicator of future performance, at least in the near term.
Netflix was the darling of video innovation, becoming the largest paid video subscription service in the U.S. (by subscriber count) and creating a tsunami of buzz of what the future of video was all about. Then the company implements a price change and suddenly stands to lose a million subscribers. The news is abuzz about them miscalculating the market, being too hasty, ham-handed and even foolish in implementing the price change. Netflix has gone from a darling among innovative companies to one that seemingly turned dumb overnight.
The range of speculation on what is causing this loss of subscriber count has everything and the kitchen sink thrown in. The question I have is not what caused this subscriber loss, but rather, so what?!
Netflix has 24 million subscribers: 24 million!! I think that still places Netflix ahead of Comcast, a milestone that rattled the windows in Q2. The worst hit Netflix will take as a result of the price increase is behind them, and it still has 24 million subscribers!
Nowhere have I read a mention of ARPU, one of the metrics subscription services live by. With financial guidance remaining the same, ARPU is trending north.
Playing to quarterly results for the Street is the death knell for growth companies. Clearly, Netflix ignored this by implementing the price increase. No one is dumb enough not to recognize that it will take a hit on account of the price change. So what if it is one hundred thousand, or one million. In the long game, Netflix is executing a strategic shift that is bound to hit some unexpected bumps along the road.
That raises the question of metrics. Innovative companies chart course by their own metrics, not those of analysts or the Street. I recently read an article that Steve Jobs made Apple what it is by ignoring profit (that of course is what Wall Street lives by). I subscribe to the thesis, and Apple is just one example.
The beauty of all this is that the companies or people we admire the most don't play by the rules we understand. I for one would like to think of Netflix as one of those companies. We were surprised when it was bidding against the likes of HBO for original content or shelling out nine figure licensing fees for premium content. Give it some time and I believe that we'll see a Netflix bounce again. Maybe a quarter or two and we'll be singing the praises of Netflix (disclaimer - I am not nor have ever been a stock holder of NFLX)
That said, as I have said before here and here, Netflix has its own conundrum for achieving long-term success. It may weather the current onslaught of subscriber response to the price changes, but whether it can make it to the big leagues in the transforming online video industry is to be seen. Netflix hopefully knows what this will require better than any of us. This round may be a play to get to the finals of that league -- rather than what a 19% drop in stock price might seem to indicate.