Hey Netflix Fans, Remember Qwikster ? The One Year Anniversary Edition

LST was rummaging through some old e-mails and found the following from none other than Reed Hastings, CEO of Netflix, received just over a year ago on September 19, 2011:

Dear Daniel,

I messed up. I owe you an explanation.

It is clear from the feedback over the past two months that many members felt we lacked respect and humility in the way we announced the separation of DVD and streaming and the price changes. That was certainly not our intent, and I offer my sincere apology. Let me explain what we are doing.

For the past five years, my greatest fear at Netflix has been that we wouldn’t make the leap from success in DVDs to success in streaming. Most companies that are great at something – like AOL dialup or Borders bookstores – do not become great at new things people want (streaming for us). So we moved quickly into streaming, but I should have personally given you a full explanation of why we are splitting the services and thereby increasing prices. It wouldn’t have changed the price increase, but it would have been the right thing to do.

So here is what we are doing and why.

Many members love our DVD service, as I do, because nearly every movie ever made is published on DVD. DVD is a great option for those who want the huge and comprehensive selection of movies.

I also love our streaming service because it is integrated into my TV, and I can watch anytime I want. The benefits of our streaming service are really quite different from the benefits of DVD by mail. We need to focus on rapid improvement as streaming technology and the market evolves, without maintaining compatibility with our DVD by mail service.

So we realized that streaming and DVD by mail are really becoming two different businesses, with very different cost structures, that need to be marketed differently, and we need to let each grow and operate independently.

It’s hard to write this after over 10 years of mailing DVDs with pride, but we think it is necessary: In a few weeks, we will rename our DVD by mail service to “Qwikster”. We chose the name Qwikster because it refers to quick delivery. We will keep the name “Netflix” for streaming.

Qwikster will be the same website and DVD service that everyone is used to. It is just a new name, and DVD members will go to qwikster.com to access their DVD queues and choose movies. One improvement we will make at launch is to add a video games upgrade option, similar to our upgrade option for Blu-ray, for those who want to rent Wii, PS3 and Xbox 360 games. Members have been asking for video games for many years, but now that DVD by mail has its own team, we are finally getting it done. Other improvements will follow. A negative of the renaming and separation is that the Qwikster.com and Netflix.com websites will not be integrated.

There are no pricing changes (we’re done with that!). If you subscribe to both services you will have two entries on your credit card statement, one for Qwikster and one for Netflix. The total will be the same as your current charges. We will let you know in a few weeks when the Qwikster.com website is up and ready.

For me the Netflix red envelope has always been a source of joy. The new envelope is still that lovely red, but now it will have a Qwikster logo. I know that logo will grow on me over time, but still, it is hard. I imagine it will be similar for many of you.

I want to acknowledge and thank you for sticking with us, and to apologize again to those members, both current and former, who felt we treated them thoughtlessly.

Both the Qwikster and Netflix teams will work hard to regain your trust. We know it will not be overnight. Actions speak louder than words. But words help people to understand actions.

Respectfully yours,

-Reed Hastings, Co-Founder and CEO, Netflix

p.s. I have a slightly longer explanation along with a video posted on our blog, where you can also post comments.

Background: LST initiated a short position in NFLX at ~$220/share earlier in 2011. The capitulation of a certain hedge fund manager got LST to pull the trigger.

Now, this initially seemed like the right move, as the trade worked immediately… but then NFLX did a u-turn, going full-retard on its way to ~$300/share… and then shortly afterwards, it began its long lasting descent. Note that $300/share (the peak) was not obvious at the time.

NFLX was cut in half just 8-10 weeks later, and LST covered within 5-10 trading days of the above speech. “Why short a guy who seemed to be taking responsibility/admitting to mistakes?,” LST figured. LST also thought NFLX was looking reasonable on valuation, there seemed to be no fraud/failure risk, the sell-off seemed over done, due for a bounce, and other people who LST respected (and were short) seemed to have bought (and were already underwater on their fairly recent long NFLX positions).

And so LST not only covered but…actually went long NFLX immediately after covering.  LST had been a NFLX customer while short and always admired the company. Reed’s apparent “mea culpa” sealed the deal.  It just felt right…

And was precisely wrong. The falling knife a.k.a. NFLX continued its descent. LST realized losses, which ended up paring some of the earlier realized gains. But it ended up being the right move, as NFLX continued its free fall well below $100… and well, you know the rest.

As of last Friday’s close, NFLX is currently trading at $57.79/share. It seems even Bernanke’s QE infinity is not doing much to help the long NFLX cause. LST knows a few shorts who consider this a “perma” short, and that between AMZN, APPL, Hulu, etc., NFLX will no longer be around. LST has no clue what’s in store for NFLX’s future.

LST does know that in nominal $ terms, NFLX’s market cap seems reasonable/appropriate compared to Blockbuster/Hollywood Video back when they were still around and doing okay. In real $ terms, NFLX may make sense as a long, but the competitive landscape, and business economics, are completely different from that era. For these, and other reasons, NFLX  is currently in LST’s “too difficult” bucket.

Due to LST’s painful experience with NFLX (that is, shorting early and covering early..also referred to as being wrong, and being wrong) , LST has fondly referred to Netflix as ‘Netsux’. So now you have the full story.

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