A $10 billion dollar question

Dear PropellerHeads: What the heck is going on with Netflix?

A: Well, isn't that the million dollar question? Or, as Netflix's stock price has dropped from almost $300 in mid-July to around $100 recently, make that a $10 billion question!

I have to admit, my answer to this question may be a bit biased because I owned Netflix stock until April of this year. What made me decide to sell? I predicted increased competition from major players such as Apple, Amazon and even Walmart would start to eat away at Netflix's good thing.

But what we've seen in both the collapse of their stock price as well as the collapse of their image is a classic example of a company that's making money hand over fist, thinking they can do no wrong, and forgetting the golden rule: The customer is king.

As a refresher, Netflix (www.netflix.com) is the company that put Blockbuster out to pasture, and it will always have a special place in my heart for that act of kindness. Via their DVD-by-mail service, they provided movie rentals more conveniently than Blockbuster. Netflix also had a much greater selection and was cheaper than Blockbuster. Later on, they added movie streaming over the Internet.

It's this last point that is the root of Netflix's current problems. They believe the DVD will go the way of the dodo, leaving only streaming. Nobody is really arguing that point, but Netflix is acting like this is imminent while I think it's going to be a few years yet.

I'm not going to go into the well-documented, bone-headed decisions made by Netflix since July and the resulting backlash. I'll leave that for Wikipedia: http://en.wikipedia.org/wiki/Netflix. Instead, I think it is a lot more fun to speculate on where Netflix will go from here.

First, their movie-by-mail side of the business will chug along pretty much business as usual. They won't be able to push through a price increase because of competition from Redbox (www.redbox.com), which provides a cheap and convenient alternative for renting recent releases. However, videophiles aren't impressed with Redbox's selection and will therefore keep Netflix afloat until DVD and Blu-Ray do eventually go the way of the dodo on Feb. 16, 2017 (we PropellerHeads just know these things).

The streaming side of things is a lot more interesting because there are (and will be) a lot more players. Amazon, Apple, Google, Hulu and Vudu (Walmart) are all competing with Netflix for this business. Those are some big names and they can throw a lot of money around.

And money is what is needed, because the movie studios aren't going to let these companies stream unless they get a nice cut off the top. That is primarily why Netflix jacked up their rates, to cover the increasing cut the studios demand. And also to get a larger library of available titles to make their service more desirable compared to the others.

If one looks at the library of movies that Netflix currently streams, it isn't too impressive yet. Neither are the libraries of their competitors. But what Netflix can offer that its competitors cannot is an impressive collection of DVDs by mail. So until their online library gets better, Netflix had better stick with the status quo, because that is their only true advantage over the competition.

Oh, and treating their customers like they exist also helps. Comcast should pick up on that too. I'm still waiting for my $100 Visa gift card after all.

When the PropellerHeads at Data Directions aren't busy with their IT projects, they love to answer questions on business or consumer technology. Email them to questions@askthepropellerheads.com or contact us at Data Directions Inc., 8510 Bell Creek Road, Mechanicsville, VA 23116. Visit our website at www.askthepropellerheads.com.