Netflix: "We Know What We're Doing"

Stock price crushed; future in question

By Scott Budman
|  Wednesday, Jul 27, 2011  |  Updated 9:31 AM PDT
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Netflix Knows What It's Doing

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Where does it go from here?

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Netflix is taking its inevitable star turn. 

The company, which has become phenomenally successful by bringing you and me a taste of Hollywood while we sit back on the couch, is having its backlash moment.  It happens to all stars:  Call it backlash, comeuppance, or just that rude awakening when you meet your idol, Netflix is having it, and it's never pretty.

After scorching through Wall Street for the last couple of years, the Netflix growth story has become well known, both in Silicon Valley -- where the company is based -- and on Wall Street, where investors have fought Vertigo just by checking the stock price. Netflix has been a seemingly unstoppable force, gaining subscribers by the ton, and turning into one of those companies (like Coca-Cola, Hershey's, or Apple) that people flat out fall in love with.

But with maturity comes hard choices. Netflix, to its credit, made them, and did not try to pull the wool over our eyes. Yes, they raised prices. A lot. And they took heat. A lot. Many of us -- and I count myself among them -- have questioned the need for our full subscriptions in light of the price hike. The Internet has been full of comments scorching the company for jacking up the cost. When the company reported otherwise strong quarterly earnings, it admitted that, in light of the price hike, it might lose a number of its customers. And, after all that growth and love, investors struck back.

Netflix stock has been so hot, it has made Google look like IBM. Everything else just seems slow and steady when you're the hot hare, and Netflix shares have been on a tear. They've tripled this year alone -- and that was after an equally sweet run last year. But, after the earning warning, Netflix tumbled, falling by about 10 percent, more than $25 a share. That's a rough day.

So, where does Netflix go from here? That's where things get impressive. Companies that read and react to message boards too much tend to veer of course. Netflix seems resolute to stay its course.  CEO Reed Hastings, in light of the backlash, says "The noise level was actually less than we expected. We knew what we were getting into." In other words, yes, charging more money is unpopular, but get used to it, we're not going anywhere.

He has a point.  Netflix is, as many of us who recently shopped around discovered, still one of the better deals of its kind. Streaming is cool, but not the be all end all yet -- and getting DVDs in the mail with no late fees is still smooth, easy, and convenient. It's hard to give either of them up, and as sick as I am of hearing the phrase, "it's as much as a latte," the price hike is, pretty much, as much as a latte. 

Netflix has some big challenges coming its way. Lots of competition from the likes of Amazon, Apple, and Hulu. The movie studios are hip to its profit margins, and they -- understandably -- want in on the action. Does anyone really want Netflix to go away? If a little extra money keeps them around, well, what's the alternative?

And the stock price? Get used to a roller coaster ride, folks. This is a tech company, after all. It's still a growth story, but there will be dips. Think of it as a show you can stream. Lots of ups and downs, the occasional cliffhanger, but overall, a satisfying experience.

Scott is a Netflix subscriber, not a shareholder. He’s on Twitter: @scottbudman 

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