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Reed, Don’t Listen To Wall Street.

Netflix stock chart

Netflix took a beating on Wall Street last week.  After revising subscriber estimates downward by 1 million subscribers, its stock went into free fall, closing the week at $155, down from a $300 peak in July. Netflix, the darling of Wall Street for the past three years, has lost half its value in a few short months.

It must be a gulp moment right now for CEO Reed Hastings, who has always set Netflix on its own path and let investors figure things out for themselves. More than any other company, Netflix represents the transition of high-end video entertainment (movies and TV shows) to the Internet. A bet on Netflix, is a bet on streaming video. That transition is inevitable. It is going to happen for many reasons. Reed knows this. He saw it earlier than most. Sending people DVDs by mail was always just an interim business model until broadband, the studios, and customers caught up.

We are still not quite there yet. The pace at which people are dropping DVDs is faster than the rate at which they are adopting streaming. The pressure on Netflix to do something to restore confidence must be severe. But Reed, don’t listen to Wall Street. Just keep pushing the studios to open up more of their movies and TV shows to streaming, and customers will follow.

However, do listen to customers. Raising prices for those of us who opt for both streaming and DVDs would have been fine if Netflix had a deeper streaming catalog. But the gap is still too big, and the price hike seemed premature. Your customers are extremely loyal. Don’t piss them off.

If you remember, it was back in July when Netflix announced new pricing that would raise prices for subscribers who get both DVDs in the mail and stream movies over the Internet. This caused a backlash among some customers, although it did have the effect of making Netflix’s streaming-only plan more attractive, with 75 percent of new customers now signing up for it.

Still, it’s not enough to offset the drop-off in DVD subscribers. Of the 1 million fewer subscribers Netflix now expects, 800,000 will be from DVD-only subscribers. The remaining 200,000 decline will come from streaming-only subs, with the number who pay for both remaining steady. Out of Netflix’s expected 24 million subscribers this year, 21.8 million will have access to streaming in some form, and only 2.2 million will stick to DVD-only subscriptions.

The shift is already clear. It is just that the exact rate at which that shift is occurring is hard to predict, hence the wild swings in the stock price. Losing the renewal of its streaming distribution deal with Starz didn’t help matters either.

Getting the studios and entertainment companies on board will continue to be the biggest challenge for Netflix. The economics of streaming don’t match the economics of other forms of distribution (like cable) for the media companies. But consumer behavior is already going in the direction of streaming. It is only a matter of how many screens you have connected to the Internet and how big they are. If it is only your computer screen, streaming is more of a last resort. But once you can get Netflix on your iPad or flat-screen TV, then it becomes one of many viewing options—and often the best one.

Personally, I stream Netflix whenever I can, even if I know the same movie is already in my DVD mail-in queue. If I could watch everything via streaming, I would. But I can’t yet, so I am reluctantly paying more for my DVD-streaming combo subscription in the hopes that I will feel comfortable dropping the DVDs in a year. If Netflix can deliver on that promise over time, then I will continue to be a lifelong customer and so will millions of others. In the end, making its product better is the only part that Netflix can control. Keep doing that, Reed, and your customers will keep backing you no matter what Wall Street thinks.

Launch Date:
September 18, 1997


With more than 23.3 million members in the United States and Canada, Netflix, Inc. is the world’s leading Internet subscription service for enjoying movies and TV shows. For $7.99 a month, Netflix members in the U.S. can instantly watch unlimited movies and TV episodes streaming right to their TVs and computers and can receive unlimited DVDs delivered quickly to their homes. In Canada, streaming unlimited movies and TV shows from Netflix is available for $7.99 a month. There are…

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Reed Hastings

Reed Hastings co-founded Netflix in 1997 with then CEO Marc Randolph and launched the subscription service in 1999. He currently serves as Chairman and CEO of the movie-rental company.

In 2005, Time magazine added Reed to its “Time 100” list of the one hundred most influential global citizens. In March 2007 Reed was appointed to Microsoft’s board of directors.

Earlier in his career, Reed founded Pure Software, which was acquired by Rational Software in 1997 after a successful IPO and numerous…

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