Ouch. Reed Hastings addressed a room of investors and media experts this week in a bid to reignite confidence in his company. After his curious speech, it’s unlikely many of them will be jumping back on the Netflix bandwagon anytime soon.
During a Q&A in a New York ballroom, Hastings said overconfidence had caused Netflix to resemble the country’s most troubled bank, Bank of America. He later added that Netflix has a new strategy to be “the Moneyball of content providers” a reference to a book about how the low-budget Oakland A’s used a knowledge of stats to compete with much richer teams
Although the session reflected Hastings deep knowledge of the entertainment business, his “better times are coming” message seemed at times to vacillate between an apology and wishful thinking.
Recall that Netflix is in a dreadful bind. The company is burning through cash at a time when content owners — many of which are developing streaming services of their own — are demanding exorbitant sums to share their shows. It is also smarting from a botched effort to split itself into two companies and from a disastrous corporate finance decision in which it blew a bundle to reacquire shares near their peak price. To shore up its cash holdings, Netflix last month had to sell new shares at a much lower price, further diluting its remaining value.
So what is Hastings’s strategy to escape this dilemma? “If you fundamentally believe Internet video will change the world … we’re the leading play on that thesis,” he said. “As long as we don’t shoot ourselves in the foot anymore, we should be a fantastic opportunity.”
Hastings’s hope appears to lie in the fact that the future will be dominated by streaming, a field in which Netflix has long been a leader. He claims that Netflix and content-rich HBO will become neck and neck rivals to serve consumers looking to stream shows on many different devices. Under this scenario, the two companies would soon resemble each other as a result of Netflix investing in content and HBO investing in distribution capacity. Hastings dismissed Amazon, which is streaming movies to its popular new Kindle Fire tablet, as a serious competitor, saying he sees the market as a two-horse race.
The other potential bright spot for Netflix is international expansion. Hastings repeatedly cited the company’s success in Canada where streaming was introduced this year. But Canada is only one-tenth the market size of the U.S. and Netflix’s larger global strategy is on hold while it concentrates on returning to profitability.
It is not clear when that return to profitability will occur. Hastings deflected a question about a return to profits by 2013 though he suggested the first quarters of next year were promising because Netflix has doubled its content.
Much is riding on this recent content strategy that includes a decision to purchase exclusive rights to a 26-part political drama House of Cards. The problem is that Netflix is in a position where it must pay more than anyone else for content, a fact that Hastings acknowledged. Unlike its rivals, it doesn’t have a vault of its own material that it can swap or license. Meanwhile, new competitors are barreling in all the time, including Verizon which is rumored to be introducing a web video service of its own.
Hence, the Moneyball strategy. Hastings says Netflix is using statistics about user views and other metrics in order to find the optimal amount to pay for each scrap of content. This is like what the Oakland A’s did in the 1990s, obtaining hidden gems that let them win baseball pennants on a shoestring payroll.
It sounds promising but it is worth noting that the A’s finished at the bottom of the American League last year, trounced by rich teams like the Yankees and Red Sox who now have stats gurus of their own. Just saying.