Saturday, November 26, 2011

Netflix Learns from Its Mistakes - Taxes Shareholders, Not Subscribers

Eduardo Saverin's shares of
Facebook were diluted 

More bad news for Netflix shareholders may mean good news for subscribers. 

Last week, Netflix issued more shares of its stock in order to raise $400 million in cash.  Netflix needs the money to license more content for its “Watch Now” instant stream library – the future of the company.

On news of this announcement, Wall Street sent the price of Netflix shares down 6.5%. This was no surprise.  Whenever a company issues more shares of stock, the reaction on Wall Street is uniformly negative because it dilutes the value of the existing shares. That’s exactly what happened to Eduardo Saverin, the Facebook founder, as depicted in the memorable scene in the “Social Network”.   

You would think that giving Wall Street more bad news was the last thing Netflix wanted to do. The battered stock has fallen from a high of $300 in July to around $63 today (translation: if you bought $1,000 worth of shares in July, you’d have lost $800 of that investment).

Given the enormous pressure to turn the stock around, the fact that Netflix chose to “tax” shareholders and not subscribers, is an encouraging sign that it learned from this summer’s missteps.  A much more Wall Street friendly way to finance the rights to more content would have been to realize Netflix’s enormous advertising potential, estimated at $60 million per quarter.  

While subscribers would never have tolerated a barrage of Hulu style ads, Netflix could have tactfully integrated advertisers within the service.  For instance, Wal-Mart could sponsor a Christmas themed playlist, which is relevant and useful heading into the holiday season.

In choosing to raise the $400 million by pissing off shareholders instead of subscribers, Netflix is showing that it learned from its mistakes. That golden rule, oft repeated by CEO Reed Hastings, is even more important in the digital age, where a mistake can turn your loyal subscribers into an angry mob quicker than you can say Qwikster.   

Regardless of how subtle the ads would be, Netflix cannot risk angering its user base again. While that may not assuage the day traders on Wall Street, prioritizing subscriber sentiment shows a company that is committed to a long term vision.  

Image courtesy of Business Insider

See More: How Netflix's Lack of Advertising is Quietly Shaping the Online Ad Business 

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1 comment:

  1. Which is a good move and a good measure. With their decreasing subscribers, taxing them could be the final nail of the coffin for them. Shareholders deserve to carry the burden as well.