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Netflix Original Programming Is Dead on Arrival (Update 1)

Updated from 9 a.m. ET with additional comments at the end reflecting the current session's stock price movement.

NEW YORK ( TheStreet) -- As an original programmer, Netflix (NFLX - Get Report) is not HBO, it's DOA.
Hemlock Grove, unfortunately, is absolutely dreadful. The Eli Roth-directed drama is an almost unwatchable muddle of horror tropes and painfully creaky dialogue.
--Jace Lacob, The Daily Beast

Ouch. Somewhere Roger Ebert thinks Jace Lacob is a badass.

I asked Lacob, via Twitter, to compare Netflix as an original programmer opposite Time Warner's (TWX - Get Report) HBO:

And herein lies the conundrum.

It's patently absurd to compare Netflix to HBO. Yet that's exactly what Reed Hastings has been doing for more than a year. That said, don't mistake Hastings for a fool. He recognizes what he's up against. He spins original programming larger than life because it represents Netflix's last ditch attempt at survival. But it's a long shot.

Nothing has changed at Netflix since 2011. At least not for the better. The following article contains everything you need to know about the company's situation headed into earnings Monday afternoon. Watch the videos. Check the links.
NFLX Longs: Don't Wind Up Like AAPL Bagholders

If the magic carpet ride continues on earnings, it will be because of Hastings' jive talk around subscriber numbers and viewing hours, two metrics that, contrary to prevailing thought, can go through the roof but do very little, if anything, to help sustain Netflix's core business. In fact, the more people watch, the more difficult it becomes for Netflix to license quality third-party content, particularly if Hastings means it when he says he will continue to charge $8 a month for unlimited viewing.

Speaking of conundrums, it will look bad to investors when Netflix goes to the market to raise cash for the third time in three years (expect that to happen within a year or so), but it will come off even worse if Hastings ends up pitching a new pricing scheme to subscribers.

UPDATE 3:00 p.m., ET

Heading into Monday's final hour of trading, NFLX was up roughly 7%, just shy of $175.

The rally comes as no surprise to those of us who have followed Netflix over the years. In fact, I have been bullish Netflix stock from as far back as July 2012 when I urged investors to buy NFLX before it rises from the dead. Reed Hastings presents us with a curious dichotomy; it's really not crazy to have seemingly conflicted thoughts. There's no question in my mind that NFLX could hit $300 per share again before going out of business.

A slightly better content acquisition strategy doesn't make Netflix all that different from what it was in 2011. Hastings still delivers the same smoke and mirrors. And he'll likely do so on Tuesday's earnings call. He'll focus on subscriber numbers, viewer hours and possibly a beat of his sandbagged guidance, but there will be little discussion from Hastings, CFO David Wells or analysts on the call (most of whom send in their questions via email so NFLX investor relations can curate them) about the reality of the content game.

And that game dictates that major players, such as Jeff Bewkes' Time Warner, allow Netflix to exist. By and large, the big content owners provide Netflix with scraps of programming. The stuff they can no longer monetize because, if they could, they would not allow Netflix to serve it up, all-you-can-eat, for the value price of eight bucks a month.

That's the reason for Netflix's desperate foray into original programming; it can't count on the third-party arrangements. As such it sets up an equally-as-impossible financial scenario, paying millions of dollars per episode for original programming that can just be inconsistently successful. It might be groundbreaking, time after time -- at or above HBO level -- to justify the investment.

All that matters is how much Netflix spends now, must spend going forward (it's up to more than $5 billion in off-balance sheet obligations due inside the next five years, as of its last earnings report) and how much it takes in -- a measly eight bones a month from subscribers who jump in, jump out and abuse the service by sharing it with millions of non-subscribers, people not willing to shell the cost of two lattes for old movies, stale reruns and ho-hum originals.

If Hastings doesn't discuss how to fix the broken business model -- by generating more revenue, some way, somehow -- proceed with caution on the stock. It's little more than a trade -- a long, irrational and very profitable one, no doubt -- but it will never be an investment. When this thing implodes -- again -- the Wall Street analysts touting Netflix today as somehow well-positioned will scatter just like did in 2011.

-- Written by Rocco Pendola in Santa Monica, Calif.
Rocco Pendola is TheStreet's Director of Social Media. Pendola's daily contributions to TheStreet frequently appear on CNBC and at various top online properties, such as Forbes.

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