You Should Welcome Advertising on Netflix

NEW YORK (TheStreet) -- He won't tell you this. And he might not even realize it yet, but Netflix (NFLX) CEO Reed Hastings painted himself into a corner.

By ignoring additional and alternative lines of revenue, Hastings tied Netflix's fate to its ability to achieve mind-blowing subscriber scale. That's a considerable risk. One that could result in catastrophe for Netflix's now high-flying stock.

Whether you're a consumer or an investor -- or both -- you should not fear advertising on Netflix. In fact, you should welcome it with Journey-like Open Arms. You just have to think differently about the notion of sponsors as part of programming.

In the comments' section of the above-linked article, Netflix subscribers freaked out at the mere mention of advertising on Netflix. But that's because, almost to a person, they view the idea in the traditional sense:

Really you are pushing for them to place ad on the TV shows that we pay money to see. We pay that money to not see ads.

No. You pay that money to keep Netflix's out-of-control and unsustainable content spending alive. You only pay $8/month because Reed Hastings botched the streaming/DVD split (that was Qwikster) in 2011.

Hastings actually made the correct decision in 2011. There's no question Netflix needed to break streaming from DVD. In fact, at the time, my thought was Netflix should have sold the DVD unit. It made the wrong move by not doing so.

But this misstep should not come as a surprise, given Hastings' pathetic handling of the DVD unit throughout 2011.

Normally, I might say What's done is done, but that's not the case. What's done haunts Reed Hastings to this day and could contribute to another 2011-like NFLX implosion.

By botching the 2011 split, Hastings ended up making it incredibly difficult, if not impossible, for Netflix to raise prices. That's something it will have to do, at some point, if it wants to survive absent some other form of revenue generation.

But after Hastings' 2011 performance, it's going to be tough to get a price hike past the public. Just look at the response when you suggest some other way -- be it advertising or on-demand, al a carte options -- to generate additional, much-needed revenue.

What the media fails to mention -- and Hastings would never bring up, assuming, again, he's even conscious to the reality -- is that the 2011 split/price hike was actually Hastings' best decision ever as Netflix CEO. That is, of course, if your goal for Netflix is long-term shareholder value creation, not the momentum-fueled magic carpet ride Hastings implicated as one reason for his stock's run.

By not seriously considering revenue outside of subscription dollars, Hastings, over the long run, does investors a disservice. And you can make the case he could ultimately hurt Netflix end users.

From an investment perspective, Hastings is not maximizing Netflix's potential. He will tell you, presumably, that by focusing on $8/month all-you-can-eat and not doing adverting, on-demand and/or e-commerce, he preserves the sanctity of the Netflix service. That's a line of crap.

Hastings has no plan beyond the hope Netflix can achieve the aforementioned scale. Other companies -- ranging from Twitter (TWTR) to LinkedIn (LNKD) and Facebook (FB) -- manage the need to stay true to a wholesome mission with the necessity of running a business that will not catch fat and happy investors with their collective pants down. You can't simply look at the run from $65 to $350 and say nothing else matters. That's a beyond dangerous proposition. It's reckless and irresponsible.

Either Hastings is the great visionary he makes himself out to be or not.

Advertising does not have to come in the form we see on Hulu or traditional television. It doesn't have to be 15-, 30- or 60-second commercial spots. It doesn't even have to be a "brought to you by" type of thing.

I'm not the genius here. Reed is. Certainly, he could find an innovative and exciting way to make advertising un-intrusive. Maybe even as asset. Heck, Hastings and his chipped-tooth line mate Ted Sarandos like to chirp about how, on the heels of their alleged original programming success, Netflix might like to reinvent movies. So why can't they reinvent advertising? Make it something people actually look forward to seeing; not a plague they avoid at all costs.

For goodness sake, I look forward to watching Canadian hockey telecasts because commercials out of Canada are so damn good, relative to what we get in the States. It doesn't take much.

But, Reed is all about "much." The guy's ahead of our collective time; surely he could crack the code here. There's nothing stopping the one-two punch of Hastings-Sarandos and, out of the bullpen, the great bean counter, Netflix CFO David Wells!

Isn't Hastings-Sarandos-Wells' job to create value? To find a way to maximize profit and revenue while not degrading the user experience? They're not doing it right now; instead they're busy playing the role of Hollywood celebrities, fat check writers and snazzy press release approvers.

But I digress ...

If you're a subscriber, you might root for Netflix to find some other way to make money. IMNSHO, the company will have a difficult time maintaining its average to slightly-above average content selection on the backs of an $8/month subscriber base that could, at a moment's notice, relatively speaking, hit the proverbial wall.

--Written by Rocco Pendola in Santa Monica, Calif.

Rocco Pendola is a columnist for TheStreet. Pendola makes frequent appearances on national television networks such as CNN and CNBC as well as TheStreet TV. Whenever possible, Pendola uses hockey, Springsteen or Southern California references in his work. He lives in Santa Monica.

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