In Defense of Netflix

netflixAccording to investment blog Seeking Alpha, Netflix is going to lower fourth quarter guidance because, among other things, "Everybody hates the split of the brand into Netflix and Qwikster." A couple of web comics, Oatmeal and The Joy of Tech, rip into the company even more mercilessly. Press coverage has been almost universally negative. This after its stock has taken a brutal battering in the past few days, plummeting over 40%.

As the pundits would have it, Netflix is a basket case run by a bunch of nincompoops who can barely dress themselves in the morning, let alone run a fast-growing media company. The funny thing is until a couple of months ago, they were perceived as having some of the savviest top management in Silicon Valley. This was reflected by their success in a cutthroat market, with nearly 30% of total internet traffic (yes, you read that right) attributable to their streaming service.

So how did Netflix go from superstar to pathetic loser almost overnight? The answer is simple: they didn't. They are continuing to execute brilliantly in a market littered with dismal failures among both incumbents and hype-fueled startups. Their recent pricing changes and even more recent split into two companies (one for DVDs and one for streaming) is hardly a refutation of this brilliance. It's a symptom of it.

The irony is that the same digerati who constantly mock Big Media for failing to "get it" are the first to bash Netflix when they demonstrate that they do. The DVD-by-post subscription service was an exceedingly clever and well-executed hack. Sending a bunch of bits back and forth on a clunky disk is slower, more expensive and more wasteful than streaming, but it got around the lack of bandwidth and the thorny copyright issues that existed when the service was launched. Needless to say, it's been a stunning success, and a lesser company would cling to it for dear life. Eventually some nimble startup would eat their lunch with a modern digital delivery service unburdened by a legacy DVD business. Everyone would laugh at how the hidebound former market leader had failed to adapt.

But Netflix has done everything right. They've separated the two services and prepared for a time in the not too distant future when DVDs will be obsolete. The stock movements mean nothing except that the normal myopic herd mentality of day traders and institutional investors continues to reign supreme (and as a newly minted shareholder, I thank them). As Andy Grove would say, Netflix has reached an inflection point and has rightly focused on where the market is going, not where it is today. They deserve praise, not mockery, for having the foresight and courage to avoid the trap that the vast majority of successful companies succumb to.

Matt

Matt