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Netflix flip-flops stir takeover talk

Nix of Qwikster drives stock down 8%

Yet another stunning decision Monday altering the strategic course at Netflix is drawing increasing attention to its CEO, Reed Hastings.

The enigmatic exec capped a quarter of questionable moves by announcing a reversal of last month’s segregation of Netflix’s DVD and streaming operation. The split decision came weeks after an equally unpopular 60% increase to the price for subscribers who want access to movies both via mail and online, a hike Netflix is keeping in place.

Killing the controversial Qwikster DVD business did little to quell separation anxiety among investors: After an early-morning rally that ran Netflix stock up 10%, it fell back down 8% before settling at $111.62. The 4.8% drop brought Netflix to a 52-week low after cracking the $300 mark earlier this year.

That Netflix stock stayed down even as the company sought to demonstrate an understanding of how it erred is testament to long-term concerns not easily dispelled. Gone is the air of invincibility that once permeated the brand and by extension its leader. Hastings’ reputation as a visionary isn’t stopping some serious second-guessing — even regarding suspicions that he may want to unload the company.

“I think his reputation and Wall Street’s love affair is tainted,” said Shahid Khan, chairman of MediaMorph, a digital media consultancy. “These two things have been tarnished forever.”

Since launching Netflix out of Los Gatos, Calif., in 1998, Hastings has been credited for staying ahead of the curve every step of the way. Even in recent quarters as he’s moved to dismantle the mail-by-DVD business that Netflix was built on, his embrace of streaming was seen as the key driver for bringing the service to more than 28 million subs — a number likely to increase because of aggressive international expansion despite the expected domestic downturn.

But Hastings has been knocked for having a tin ear when it comes to listening to the many subscribers who have been extremely vocal in complaining about the price increases in particular. Even “Saturday Night Live” mocked him in a skit in which, played by actor Jason Sudeikis, Hastings is seen smiling unflappably as he repeatedly changes his mind about what to do next with Netflix.

That’s a perception that may be lodged in consumers’ minds, according to Lazard Capital Markets analyst Barton Crockett. “Netflix’s very visible waffling also likely dinged domestic momentum near-term,” he noted.

Hastings may also have underestimated the competitive marketplace. Though competitors are far behind on a subscriber basis, they’re all scrambling to make up for lost time. In the last month alone, Amazon and Hulu have increased content deals and penetration of new devices including Amazon’s own Kindle Fire, while Dish Networks repositioned Blockbuster as a streaming add-on to its core satellite offering.

For its part, Netflix hasn’t been standing still on the content side, adding key content deals with DreamWorks Animation, Discovery and AMC. But it also lost a huge partner in Starz, which will pull high-profile titles from Disney and Sony early next year — a loss Hastings has sought to play down.

Now Hastings has been forced to pull an about face on the very decision he released a video of himself supporting just weeks earlier — a reversal Wall Streeters agreed was a good PR move that showed a humbler, less impulsive management. It could “help to begin reversing the negative news cycle the company has found itself in over the last few months,” said JP Morgan analyst Doug Anmuth.

While a longtime bear on Netflix stock, Wedbush Securities analyst Michael Pachter doesn’t believe the board will lose faith in Hastings. He likened the prospect of parting ways with him as misguided as Apple’s decision to dump Steve Jobs in the 1980s.

“Reed is as visionary to streaming as Steve was to entertainment devices, you don’t lightly replace a guy like that,” said Pachter. “There’s no John Sculley there to turn this ship around.”

Then there’s the possibility that Hastings may be angling to sell. Given the inscrutability of the Qwikster move, one school of thought among analysts was that Hastings was positioning the streaming-only side of Netflix for acquisition. Pachter saw Amazon as a possible suitor, though he’s since dismissed that prospect given Netflix’s subsequent implosion.

But Khan notes that Netflix’s nosedive could very well make it an acquisition target. With its market capitalization down to about $6 billion, that could make an attractive pricetag for companies coveting its premium content deals. “If Google is willing to pay $4 billion for Hulu, wouldn’t they rather buy Netflix for $6 billion?” said Khan.

Of course, Netflix hasn’t publicly signaled it is for sale, though as Pachter suggests, that could be a whole different story behind closed doors. But if a company like Google had to resort to a hostile takeover, that could mean paying a price far above $6 billion — still not an impossibility for a deep-pocketed firm capable of shelling out twice that much for Motorola Mobility earlier this year. Same goes for Apple, which has long been criticized for sitting on cash reserves of $76 billion — more than enough to put it in the subscription VOD game it has also been rapped for missing.

Lazard’s Crockett doesn’t buy the acquisition talk. “We see Netflix’s lofty market cap, and the need for an acquirer to pay a big premium to take over the company, as tilting the scales solidly towards build over buy, especially since the bulk of Netflix’s content can be licensed by anyone willing to write a check.”

Jill Goldsmith contributed to this article.

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