Has Netflix lost it?

Netflix’s magical misery tour continues, with news that subscriber defections are coming at a much greater rate than anticipated. The stock plunged, again.

What we have here is the spectacle of a public company being punished and humiliated by once-loyal customers. DVD rentals came up 800,000 subs short, Netflix said, while the once-skyrocketing video streaming service shed 200,000. That’s 1 million revenue streams lost in transition.

(Update: Read CEO Reed Hastings’ blog post “An Explanation and Some Reflections,” issued Monday, Sept. 18. It has an apology of sorts and further disruption: Netflix is spinning off its DVD rental business into something called Qwikster.)

Citing Netflix’s greed in effectively raising prices 60 percent, many subscribers had pledged to dump the company’s services on principle. And followed through.

“I dropped Netflix DVD rentals … just because the amount of the increase and the arrogance with which it was delivered,” one ex-customer wrote the other day. “It’s on a deeper level than just bucks.”

The company was pummeled by Wall Street, yet again, with a nearly 25 percent drop in stock value over the past two market days. Netflix stock has lost half its value in a matter of months — mostly via self-inflicted wounds. (Update: Netflix stock lost another 7.3 percent Monday, another 9.5 percent Tuesday and slowed the freefall with a 1.2 percent loss Wednesday. The stock actually increased a tad on Thursday, a crap day for the market.)

Perhaps Netflix at $155 represents a terrific buying opportunity, a fire-sale on an industry leader. The company says it’ll meet financial guidance when it reports on Q3 in a couple of weeks. A year from now, CEO Reed Hastings could again be considered a genius. But not today.

Stockholders have been sickened by the stock’s plunge. Netflix has done nothing of consequence to keep the stock afloat. (Wouldn’t be hard, since Wall Street would lap up a serving of good news.)

CEO Hastings has said he doesn’t pay attention to his stock price, and that certainly seems so.

It’s a sorry story, this downward spiral.

The main event was a marketing blunder to rival the infamous New Coke campaign:

Two months ago, Netflix whipped out a 60 percent price increase for customers who stream video and get DVDs by mail. And billed it as a good thing, since people could save money by going with one service or the other.

Netflix explained that DVDs and streaming media have nothing to do with each other. The CEO’s recent proclamations that DVD rentals were on life support proved premature, Netflix said — in fact, the red-envelope rentals were alive, well and in need of a shiny new division with a separate revenue stream. (The latest numbers certainly suggest otherwise.)

Netflix stock then took a sudden and savage and ass-beating, as Wall Street shook its head and listened to sound and fury of subscribers.

“We know our decision to split our services has upset many of our subscribers, which we don’t take lightly … ” Hastings wrote in a Sept. 15 letter to “fellow shareholders.”

Hastings and Netflix appear clueless, or, at best, insensitive, to the lot of subscribers and investors.

Netflix also failed to grok the importance of the early adopters, influencers and evangelists who made its Watch Instantly the industry leader in streaming online video. In mid-July, that thin line between love and hate disappeared in a matter of hours. Netflix’s blog maxed out on reader comments, almost all of them code-red negative.

One customer posted in response to the 60 percent hike: “I have had my account more than a decade and I must confess I feel very much taken for granted right now.”

Instead of grandfathering in the existing rate for longtime subscribers — or providing some sort of loyalty consideration — Netflix charges its loyalists every bit as much as anyone who first logged in 10 seconds ago.

A lot of folks had viewed Netflix as another Apple, one of the good guys improving our lives with vision and verve.

Now, Netflix looks like a fool and a villain.

Here are some other sorry moments in Netflix’s recent history:

• Loss of the Criterion Collection to Hulu Plus, in apparent dispute over branding. Netflix loyalists overran Hulu’s blog with nasty comments. Criterion’s library is the best arthouse collection in the world.
• Loss of Sony Pictures films.
• Netflix redesigns Watch Instantly’s web site pages. Subscribers hate it, leaving thousands of complaints on the company blog.
• Almost no content deals of consequence bring in new blood. (“Mad Men” a notable exception.) The “new arrivals” movie queue offers little that’s new — outside of genre, indie and foreign fare. Bollywood, anyone? Japanese zombie movies?
• The year’s one major content deal, for Miramax films, is immediately duplicated by Hulu Plus, which then brings the indie major’s titles to market before Netflix. Miramax proves a stingy provider.
• Starz pulls out of Netflix negotiations. That content is set to disappear with the new year, just after what’s left of Criterion’s films disappears.
• News of Netflix’s Latin American expansion has no lasting effect on stock. Analysts seem wary of overspending.

Can it get much worse? Oh yeah …

Google looks to be the new owner of Hulu, the rival service started by NBC Universal, Fox and (later) Disney. Despite Google’s failures to bring premium content to YouTube, it’s certain that news of the deal will send Netflix stock into another free-fall.

What now?

Netflix’s goodwill is gone, never to return to early 2011 levels. Bank on that.

But things could right themselves in the long run. Consider:

• Netflix’s prices are fair, even after the increase.
• Netflix remains the brand name in online video streaming.
• Hulu’s film offerings remain anemic beyond the Criterion titles (which are hard to find and poorly presented). The subscriber count is dwarfed by Netflix’s. If you don’t like network TV or arthouse cinema, Hulu Plus sucks.
• Increased revenues will allow Netflix to buy more film and TV rights. Distributors may play hard ball, but they need to make money — and Netflix remains the best streaming-video provider on our continent.
• The media over-amplifies consumer sentiment that Netflix streaming video offers little of value, too late. True for many viewers, but adventurous film fans can find plenty of amazing below-the-radar fare. Netflix does not pretend the be in the latest-hits business, anyway.
• The vengeful subscribers who quit or downsized could return in time.
• The holidays should bring a flood of new customers who figure out how to work the wi-fi networking on their new TVs and Blu-ray players. Netflix software is omnipresent in consumer electronics.
• Many analysts see Netflix stock recovering before the New Year. Netflix isn’t suddenly worth half of what it was in early July. The market simply can’t parse information about Netflix and walk at the same time, but will get things sorted out in time.

(Peter Kafka of the Wall Street Journal has a completely different take. Read his analysis of Netflix.)

Disclaimer: The author of this post is a disgruntled Netflix investor who continues to subscribe to its DVD rentals and streaming video. He very much enjoyed last night’s streaming of “Tokyo Zombie.”