by Adam Hartung | Oct 4, 2011 | Current Affairs, Defend & Extend, Film, In the Rapids, Innovation, Leadership, Television, Transparency, Web/Tech
Reed Hastings, the CEO of Netflix, has long been considered a pretty good CEO. In January, 2009 his approval ranking, from Glassdoor, was an astounding 93%. In January, 2010 he was still on the top 25 list, with a 75% approval rating. And it's not surprising, given that he had happy employees, happy customers, and with Netflix's successful trashing of Blockbuster the company's stock had risen dramaticall,y leading to very happy investors.
But that was before Mr. Hastings made a series of changes in July and September. First Netflix raised the price on DVD rentals, and on packages that had DVD rentals and streaming download, by about $$6/month. Not a big increase in dollar terms, but it was a 60% jump, and it caught a lot of media attention (New York Times article). Many customers were seriously upset, and in September Netflix let investors know it had lost about 4% of its streaming subscribers, and possibly as many as 5% of its DVD subscribers (Daily Mail).
No investor wants that kind of customer news from a growth company, and the stock price went into a nosedive. The decline was augmented when the CEO announced Netflix was splitting into 2 companies. Netflix would focus on streaming video, and Quikster would focus on DVDs. Nobody understood the price changes – or why the company split – and investors quickly concluded Netflix was a company out of control and likely to flame out, ruined by its own tactics in competition with Amazon, et.al.
(Source: Yahoo Finance 3 October, 2011)
This has to be about the worst company communication disaster by a market leader in a very, very long time. TVWeek.com said Netflix, and Reed Hastings, exhibited the most self-destructive behavior in 2011 – beyond even the Charlie Sheen fiasco! With everything going its way, why, oh why, did the company raise prices and split? Not even the vaunted New York Times could figure it out.
But let's take a moment to compare Netflix with another company having recent valuation troubles – Kodak.
Kodak invented home photography, leading it to tremendous wealth as amature film sales soared for seveal decades. But last week Kodak announced it was about out of cash, and was reaching into its revolving credit line for some $160million to pay bills. This latest financial machination reinforced to investors that film sales aren't what they used to be, and Kodak is in big trouble – possibly facing bankruptcy. Kodak's stock is down some 80% this year, from $6 to $1 – and quite a decline from the near $80 price it had in the late 1990s.
(Source: Yahoo Finance 10-3-2011)
Why Kodak declined was well described in Forbes. Despite its cash flow and company strengths, Kodak never succeeded beyond its original camera film business. Heck, Kodak invented digital photography, but licensed the technology to others as it rabidly pursued defending film sales. Because Kodak couldn't adapt to the market shift, it now is probably going to fail.
And that is why it is worth revisiting Netflix. Although things were poorly explained, and certainly customers were not handled well, last quarter's events are the right move for investors in the shifting at-home video entertainment business:
- DVD sales are going the direction of CD's and audio cassettes. Meaning down. It is important Netflix reap the maximum value out of its strong DVD position in order to fund growth in new markets. For the market leader to raise prices in low growth markets in order to maximize value is a classic strategic step. Netflix should be lauded for taking action to maximize value, rather than trying to defend and extend a business that will most likely disappear faster than any of us anticipate – especially as smart TVs come along.
- It is in Netflix's best interest to promote customer transition to streaming. Netflix is the current leader in streaming, and the profits are better there. Raising DVD prices helps promote customer shifting to the new technology, and is good for Netflix as long as customers don't change to a competitor.
- Although Netflix is currently the leader in streaming it has serious competition from Hulu, Amazon, Apple and others. It needs to build up its customer base rapidly, before people go to competitors, and it needs to fund its streaming business in order to obtain more content. Not only to negotiate with more movie and TV suppliers, but to keep funding its exclusive content like the new Lillyhammer series (more at GigaOm.com). Content is critical to maintaining leadership, and that requires both customers and cash.
- Netflix cannot afford to muddy up its streaming strategy by trying to defend, and protect, its DVD business. Splitting the two businesses allows leaders of each to undertake strategies to maximize sales and profits. Quikster will be able to fight Wal-Mart and Redbox as hard as possible, and Netflix can focus attention on growing streaming. Again, this is a great strategic move to make sure Netflix transitions from its old DVD business into streaming, and doesn't end up like an accelerated Kodak story.
Historically, companies that don't shift with markets end up in big trouble. AB Dick and Multigraphics owned small offset printing, but were crushed when Xerox brought out xerography. Then, afater inventing desktop publishing at Xerox PARC, Xerox was crushed by the market shift from copiers to desktop printers – a shift Xerox created. Pan Am, now receiving attention due to the much hyped TV series launch, failed when it could not make the shift to deregulation. Digital Equipment could not make the shift to PCs. Kodak missed the shift from film to digital. Most failed companies are the result of management's inability to transition with a market shift. Trying to defend and extend the old marketplace is guaranteed to fail.
Today markets shift incredibly fast. The actions at Netflix were explained poorly, and perhaps taken so fast and early that leadership's intentions were hard for anyone to understand. The resulting market cap decline is an unmitigated disaster, and the CEO should be ashamed of his performance. Yet, the actions taken were necessary – and probably the smartest moves Netflix could take to position itself for long-term success.
Perhaps Netflix will fall further. Short-term price predictions are a suckers game. But for long-term investors, now that the value has cratered, give Netflix strong consideration. It is still the leader in DVD and streaming. It has an enormous customer base, and looks like the exodus has stopped. It is now well organized to compete effectively, and seek maximum future growth and value. With a better PR firm, good advertising and ongoing content enhancements Netflix has the opportunity to pull out of this communication nightmare and produce stellar returns.
by Adam Hartung | Dec 15, 2010 | Current Affairs, In the Swamp, Leadership, Openness, Television, Web/Tech
Summary:
- Business leaders are honored for creating profitable growth
- Those who create the greatest growth disrupt the status quo and change the way things are done – such as Zuckerberg and Jobs
- Too many CEOs act as caretakers, overlooking growth
- Caretakers watch value decline
- Under Welch, GE dramatically grew and he was Time’s Person of the Year
- Under Immelt, GE has contracted
- Too many CEOs are like Immelt. They need to either change, or be replaced
It’s that time of year when magazines like to honor folks for major accomplishments. This year, Time’s Person of the Year is Mark Zuckerberg, honored for leading Facebook and its dramatic change in social behavior amongst so many people. Marketwatch.com selected Steve Jobs as its CEO of the Decade – an honor several journals gave him last year!
There is of course a bias in these selections. Most journals highly favor CEOs that drive up their stock price! For example, Ed Zander was CEO of the year in 2004 for his “turnaround” at Motorola – and within 2 years he was fired and Motorola was facing possible bankruptcy. Obviously his “quick fix” (getting the RAZR out the door with a big marketing push) didn’t pan out so well over time. We’ll have to see if Alan Mulallly deserves to be CEO of the Year at Marketwatch, since it appears his selection has more to do with not letting Ford go bankrupt – like competitors GM and Chrysler – and thus reaping the benefits of customers who wanted to buy domestic but feared any other selection. Whether Ford’s “turnaround” will be a winner, or another Zander/Motorola, we’ll know better in a couple of years.
One fellow who isn’t on anybody’s list is Jeff Immelt at General Electric. His predecessor was. Given that
- GE is the oldest company on the DJIA (Dow Jones Industrial Average)
- GE is one of the most widely held of all corporations
- GE is one of the largest American corporations in revenues and employees
- GE is in a plethora of businesses, globally
- Mr. Immelt is paid several million dollars per year to lead GE
It is worthwhile to think about why he’s not on this list – whether he should be – and if not, whether he should keep his job!
Since Immelt took the helm at GE, the value has actually declined. He’s not likely to win any awards given that sort of performance. Amidst the financial crisis, he had to make a very sweet deal with Berkshire Hathaway to invest cash (via preferred shares) in order to keep GE out of bankruptcy court – a deal that has enriched Mr. Buffett’s company at the expense of GE. GE has exited several businesses, such as its current effort to unload NBC via a deal with Comcast, but it has not created (or bought) a single exciting, noteworthy growth business! GE has become a smaller, lower growth company that narrowly diverted bankruptcy. That isn’t exactly a ringing endorsement for honors!
Yes, GE has developed a nice positive cash flow, which will allow it to repurchase the preferred shares from Berkshire (Marketwatch “GE to Buy Back Buffett’s Preferreds Next Year.”) But what is Mr. Immelt doing to create future shareholder value? His plan to make a few acquisitions, pay some higher dividends (suspended when the company faltered) and repurchase equity offers shareholders very little as a way to generate high rates of return! Why would anyone want to own GE? Nobody expects the company to be a growth leader in 2012, or 2015. With its current businesses, and strategy, there is no reason to expect GE to produce double digit earnings growth – or double its equity within any reasonable investing horizon.
There’s more to being a CEO than being a “caretaker.” Mr. Immelt’s predecessor, Jack Welch, created enormous value for shareholders. Mr. Welch was willing to disurpt the GE status quo. In fact, he intentionally worked at it! He made sure business leaders were constantly challenged to find new markets, create new products, expand into new businesses, leverage new technologies and generate growth! Mr. Welch was willing to take GE into growth markets, give leaders permission to create new Success Formulas, and invest in whatever it took to profitably grow revenues. During the Welch era, competitors quaked at the thought of GE entering their markets because things were always shaken up – and GE changed the game in order to create higher rates of return. During the Welch era investors received amongst the highest rate of return on any common stock! GE value multiplied many-fold, making pensioners (invested in the stock) and employees quite wealthy – even as employment expanded dramatically. That’s why Mr. Welch was Time’s Person of the Year in 2000 — and for many the CEO of the previous decade.
Mr. Immelt, on the other hand, has done nothing to benefit any of his constituencies. Like far too many CEOs, he took a much less aggressive stance toward growth. He has been unwilling to challenge and disrupt existing leaders, or promote aggressive market disruptions through the GE business units. He has not invested in White Space projects that could continue the massive expansion started during the Welch era. To the contrary, he has moved much more slowly, and focused more on selling businesses than growing them. He has resorted to trying to protect GE – rather than keep it moving forward. As a result, the company has retrenched and actually become less interesting, less valuable and less clearly able to produce returns or create new jobs!
Mr. Immelt certainly has his apologists, and seems to securely have the support of his Board of Directors. But we should question this. It actually has an impact on the American economy (and that of several other countries) when the CEO of a company as large as GE loses the ability to create growth. The malaise of the American economy can be directly tied to CEOs who are operating just like Mr. Immelt: doing almost nothing to create new markets, new sources of revenue, new jobs. Many business journalists like to say the government doesn’t create revenue, or jobs. So who will create them when corporate leaders are as feckless as Mr. Immelt? Especially when they control such vast resources!
Congratulations to Mr. Zuckerberg and Mr. Jobs (and Mr. Hastings of Netflix who was named Fortune magazine’s CEO of the Year.) They have created substantial new revenues, profits, cash flow and return for investors. Their company’s employees, suppliers, customers and investors have all benefitted from their leadership. By disrupting the way their company’s operated they pushed into new markets, and demonstrated how in any economy it is possible to create success. Caretakers they are not, so like Mr. Welch each deserves its recent accolades.
And for all those CEOs out there who are behaving as caretakers – for all who are resting on past company laurels – for all who have watched their company value decline – for those who think it’s OK to not grow – for those who blame the economy, or government, or competitors, or customers or their industry for their inability to grow —- well, you either need to learn from these recently honored CEOs and dramatically change direction, or you should be fired.
