Netflix Earnings Release: Why Reed Hastings Needs To Go

Netflix released its third quarter earnings Monday, which took a hit from the ill-fated price hike in July, its botched attempt at splitting and rebranding its DVD-by-mail service into Qwikster in September, and its numerous other blunders and miscues. At least from a PR perspective, it was the worst quarter in Netflix's nine-year history.

To make things worse, CEO Reed Hastings predicted poor performance in the current quarter. The company predicted a continued drop in the number of subscribers after losing 810,000 in the third quarter. As a result, Netflix shares fell more than 21 percent after regular trading to $93.30 after closing Monday at $118.84, up $1.80.

While we dramatically improved our $7.99 unlimited streaming service by embracing new platforms, simplifying our user interface, and more than doubling domestic spending on streaming content over 2010, we greatly upset many domestic Netflix members with our significant DVD-related pricing changes, and to a lesser degree, with the proposed-and-now-cancelled rebranding of our DVD service, the company said.

Netflix lost about 800,000 U.S. subscriptions in the third quarter, recording 23.8 million unique subscribers, down from last quarter's 24.6 million. However, Netflix reported $822 million in global revenue, up from second quarter revenue of $789 million, and even saw an increase in international subscriptions from 970,000 to 1.5 million. Net income was $62.4 million, or $1.16 a share, slightly ahead of estimates.

Netflix reported $366 million in cash. Last quarter the company spent nearly $40 million to buy back 182,000 shares.

However, Netflix expects a bleak fourth quarter, predicting no more than 21.5 million subscriptions, which could mean as many as 2 million more subscribers will depart.

For a short time, Netflix ruled the world. It revolutionized the way people watch new movies with its instant streaming service, and its DVD-by-mail service officially eclipsed Blockbuster on Sept. 23, 2010, when the video rental chain filed for bankruptcy. Later that same day, Netflix announced it was expanding to Canada.

However, the last several months have been disquieting for Netflix. The root of the problem was a sudden 60 percent price increase for the company's DVD mailing service, from $9.99 to $15.98, which angered customers and prompted many to leave.

In just six hours after Netflix made the announcement on its blog, more than 9,000 comments were posted on the company's Facebook page in response. Most of them were furious.

I can't believe the gall of a company raising what I can get today by over 60 percent! wrote Facebook user Barbra Watkins. No special offers to current customers and no reduced price for getting both. How is this in any way a good deal? Amazon Prime... Here I come. At least they care about customer costs. We canceled today and won't be back.

To quell the mass exodus from Netflix, CEO Hastings e-mailed an apology to customers on Sept. 19, but rather than retract the price hike, he frustrated customers even further. He decided to split off the company's DVD-by-mail service into a new company called Qwikster, a name that will live in infamy. In Monday's earnings release, Hastings was also apologetic.

Qwikster promised the same Netflix service (and price, unfortunately), but the service was completely split off from Netflix so customers with both services would have needed to manage separate queues on separate websites. Burdened by further inconvenience, fans and customers lashed out.

I just got your e-mail, and, as a long-time customer, quite frankly found it to be offensive and perhaps a devastating miscalculation for your business, wrote David Isaacson, 47, of Chicago.

To make matters worse, it seemed as though Netflix had never done any thorough research of the name Qwikster. When Hastings announced Qwikster, users flocked to Twitter to see if there was an account already in place, only to find the @Qwikster handle was already being occupied by a foul-mouthed, drug-using Tweeter.

Michael Gordon, CEO of Group Gordon, a PR firm based in New York, said at the time, I have a feeling the apologies are just beginning. They're catching customers off-guard by making huge changes and not providing a lot of explanation for them. It's been handled poorly.

Gordon was correct. On Oct. 10, the Netflix team sent out yet another e-mail apology to customers, informing them that Qwikster was killed, by popular demand.

It is clear that for many of our members two Web sites would make things more difficult, so we are going to keep Netflix as one place to go for streaming and DVDs, the e-mail said. This means no change: one Web site, one account, one password... in other words, no Qwikster.

While it was definitely the right move to shutter Qwikster, Netflix still has a long road ahead for a full recovery. The recovery time will be substantially shorter, however, if Netflix can separate itself from the man behind these embarrassing gaffes and give Reed Hastings the axe.

Hastings' decisions over the last quarter were handled extremely poorly. He was unprepared every step of the way. He didn't expect customers to react to the price hike and Qwikster in the way they did, but that just goes to show how out of touch Hastings is. In the information and social media age, customers want to know that they're valued, listened to and kept in the loop, but Hastings showed no consideration at all during the Qwikster saga.

Netflix continues to freefall out of favor, and investors have taken notice. Upon canning Qwikster, Netflix's share prices plummeted to a 52-week low of $108.66, and have dropped by almost two-thirds since July. At the Monday close of $118.84, the company was still valued around $6.1 billion.

The company continues to expand in spite of its leader. On Monday, Netflix announced it will extend its movie rental service to the U.K. and Ireland, its first foray outside the Americas. Netflix also recently signed a deal with Dreamworks Animation to bring its films and TV specials to its online streaming service, a deal reportedly worth $30 million per picture over an unspecified number of years.

Yet, despite the company's forward momentum, Netflix cannot risk another mistake from Hastings. Competitors like Redbox, Amazon Prime, and even Blockbuster are making strides by signing more partners and distributors, and will attempt to woo unsatisfied Netflix customers. But if Netflix has any chance of surviving and thriving in the future, it needs to distance itself with Hastings, who has virtually become synonymous with Qwikster.