The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (
) -- By now, it's old news that Netflix has aborted its plan to break up its service into separate DVD-by-mail and online streaming services. And by now, we all know why. Customers were in revolt over the changes to a brand that they loved and the price increases that were necessary to make those changes possible.
Along with Monday's announcement, Netflix revealed the damage done in real numbers. The company
ended the third quarter with 800,000 fewer subscribers and its stock price plunged by 37%. Company profits tell a more reassuring story, as the company
a net income of $62.5 million, up almost $25 million from the previous year, with total revenue up 49% to $822 million.
In any event, for Netflix the negative consequences of this episode are likely short-term. With Apple and Amazon among the barbarians at his gate, the moves CEO Reed Hastings made to emphasize streaming over old-fashioned DVD rentals, and to raise prices for its services, were the right business moves, however sloppy the communication.
A simple calculation confirms that point, notwithstanding all that has been written about the 800,000 lost subscribers. The company potentially lost $12.8 million per month when these subscribers left the fold, which Netflix attributes largely to the price increase. But, the company stands to gain more than 10 times that much: $142.8 million per month on its remaining
23.8 million domestic subscribers
simply in the delta between the old and new price points (assuming they all stay on at the $16 rate).
It's the companies that get the wrong message from the current controversy that stand the greater risk of long-term and potentially catastrophic consequences. The worst conclusion when an industry leader like Hastings seems to stumble (and "seems" is the operative word) is that he was too bold by half; that risk needs to be minimized; that you don't fix what ain't broken; and that, in general, innovative, future-oriented leadership is somehow possible absent the kind of calculated risk-taking that distinguishes pioneers like Hastings.
In business, in sports, in politics, it's a truism that every idea that fails is not by definition a bad idea. Innovation is the lifeblood of business and the key to future survival. As companies must contend with seismic changes in technology and consumer behavior, the calculus of change vs. stasis, of risk and benefit, is decisive. As one commentator has
, "Today's business conditions give new meaning to the words of the Greek philosopher Heraclitus: 'All is flux, nothing stays still - there is nothing permanent but change.' "
Buck that inexorable trend, and you run what's really the greatest risk, of becoming the next
. Steve Jobs is the legend he became because he
sometimes when you innovate, you make mistakes. It is best to admit them quickly, and get on with improving other innovations."
Reed Hastings knows it too. It's possible, just possible, that he has more in common with Steve Jobs than his current detractors might recognize. Up until September, he could do no wrong. Fortune's 2010 business person of the year, he was hailed as a bold visionary for capitalizing on the next big idea that revolutionized an industry. Blockbuster, less nimble and quick, ignored the changing business dynamic and authored its own demise.
By emphasizing streaming over traditional DVD services, Reed Hastings was doing what he has always done best -- ensuring that his company does not fall prey to technological obsolescence. If Netflix made business mistakes -- a debatable point -- its instinct toward innovation wasn't one of them. It would be a huge mistake for companies to use the Netflix story as a reason to play it safe.
Hastings has been
as saying he still believes that the company's future lies in streaming, and most analysts and investors would presumably agree. If the 800,000 customers who cancelled their subscriptions are too big a hit for Netflix to take, then Hastings may indeed be the pioneer who gets the proverbial arrow with no choice but to now engage in a tactical retreat.
But I'd hate to see what our economy will look like in the next decade or two if companies in or out of the technological sector base their growth strategies on tactical retreats.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.