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The real failure at Netflix

Netflix ($NFLX) has come under a great deal of criticism for the decision to split its business into separate streaming and DVD-by-mail companies. Nearly everyone agrees that the DVD business is in terminal decline.  The only question is how fast will that business get displaced by streaming. However the manner in which the company has done the split has prompted some customers like Lew Harris at The Wrap to give up their subscriptions.

The bigger question for Netflix the company is why was it buying back shares throughout the stock’s run up?  The chart below shows that Netflix has been buying a relatively consistent share repurchaser including in 2011.

1ea1311a593d976f10251db85f9cf70d The real failure at Netflix

Netflix Stock Buybacks Stock Chart by YCharts

Rather than buying back shares throughout 2011 the company would have been better served issuing shares so as to better fund the transition from DVD to streaming.  Herb Greenberg at CNBC made this point earlier in the year.  Losing content from the likes of Sony and Starz has only served to convince some that the Netflix streaming model is flawed.

In short it looks like Netflix management began to believe their own hype as the stock ran from $50 to nearly $300.  The fact that Reed Hastings took the step to respond publicly to Whitney Tilson’s short case against Netflix now seems like misplaced effort.  Rather than worrying about the stock price they should have been more worried about their financial position and their business model.

*No position in NFLX.  Long time customer.

Additional reading:

Whitney Tilson’s short case against Netflix.  (Seeking Alpha)

Reed Hasting’s response to Tilson.  (Seeking Alpha)

Netflix is disrupting itself, but is it doing it the right way?  (Slate, Atlantic Business, GigaOM)

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