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Netflix Shocker: Confidence Crisis

Lack of confidence in leadership spurs sell-off despite sound strategy

Boomberg's Cliff Edwards reported the facts well:

Netflix Inc. (NFLX) dropped the most in seven years after the video-rental service said it lost 800,000 U.S. subscribers in the third quarter, more than expected, and predicted more cancellations over a price increase.

Netflix plunged 37 percent to $75.28 at 9:39 a.m. New York time, for the biggest intraday decline since October 2004. The stock closed at an all-time high of $298.73 on July 13, according to Bloomberg data.

The outlook suggests Netflix has been unable to contain a subscriber revolt over a price increase and aborted plan to force subscribers into separate streaming and DVD services. The company now forecasts losses in 2012 because of costs to offer content in the U.K. and Ireland, and will delay further expansion until profitability is restored.

Sound Strategy
It's clear that Netflix understands what's going on in the world of DVDs and digital content.  I daresay they understand it better than just about anyone else on the planet.  They have a sound strategy - it's all about streaming media.

But it takes more than knowledge and strategy to keep a great company going. And I do want to acknowledge that Netflix was a great company.

Scared Investors
Sound strategy is worth nothing unless someone can turn it into results - it must be backed up by solid plans which demonstrate insight and good judgment and are then executed flawlessly.

There's the disconnect.  At every major junction in past months, the Netflix leadership (i.e., Hastings) has acted as if good judgment and customer insight have suddenly disappeared.

Investors no longer believe that Hastings (or Netflix) really understand their own customers anymore.  When a company loses touch with its customer base, they lose the ability to lead.  And they lose the ability to predict.  Hastings has not only lost touch with the customer base, he's created an adversarial relationship.

You Can't Lead If...
If you're not in touch with your customers, if you don't "grok" their needs, concerns and issues, you can't be a leader.  You're bound to make decisions that raise the ire of the customer base.  Surprises happen.  Investors tend to intensely dislike surprises - it demonstrates that you're not in control of the ship.

When Your Credibility Is Gone
Clearly Hastings has lost the most important thing that a leader needs - credibility.  People no longer have faith in him to make good decisions.  Faith is so difficult to earn, so easy to destroy and almost impossible to earn back.

Why did the stock tank by 37% overnight?  Lack of confidence that Hastings is in control.  Lack of confidence in his ability to fix the situation.  Lack of confidence in his ability to successfully expand in Europe.

Netflix Loss of Market Capitalization

The Recovery?
Personally, I'd like to see Hastings accept real responsibility for all the disasters, and resign - be driven into the wilderness like some goat in ancient times with the sins of the company heaped upon it.  Then Netflix could find a clean leader (i.e., someone from outside Netflix) to restore credibility.

Past Is Prologue
But if past is prologue, it won't work that way.

Hastings will stay on for whatever reason, perhaps pride.  "Wall Street" will take forever to forgive him - if they ever do.  Every little error will turn into a big brouhaha and every victory will be ignored.  That's the way these things seem to work.  More often than not, the stock price languishes for (what seems like) an eternity in the toilet.  And then the CEO finally steps down - a year or two later (way too late).  Take a look at the list of CEOs who really messed up at the end -  Sculley, Capellas, Fiorina, Nardelli, Mozilo, Levin, Smith,  Akers, Lay....

More Stories By Hollis Tibbetts

Hollis has established himself as a successful software marketing and technology expert. His various strategy, marketing and technology articles are read nearly 50,000 times a month. He is currently Director for Global Marketing Operations for Dell Software Group.

Hollis has developed substantial expertise in middleware, SaaS, Cloud, data management and distributed application technologies, with over 20 years experience in marketing, technical, product management, product marketing and business development roles at leading companies in such as Pervasive, Aruna (acquired by Progress Software), Sybase (now SAP), webMethods (now Software AG), M7 Corporation (acquired by BEA/Oracle), OnDisplay (acquired by Vignette) and KIVA Software (acquired by Netscape). He has established himself as an industry expert, having authored a large number of technology white papers, as well as published media articles and book contributions.

Hollis is a regularly featured blogger at ebizQ, a venue focused on enterprise technologies, with over 100,000 subscribers. He is also an author on Social Media Today "The World's Best Thinkers on Social Media", and maintains a blog focused on creating great software: Software Marketing 2013.
He tweets actively as @SoftwareHollis

Additional information is available at HollisTibbetts.com

All opinions expressed in the author's articles are his own personal opinions vs. those of his employer.