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Netflix airs its TV shows and movies over an Internet connection to computers, Web-connected TV sets and gaming consoles.


Everyone is trying to make sense of Netflix Inc. right now, and not just because of the pricing and restructuring efforts made by the company. The fact is, the once-hot stock has turned seriously cold, falling 56 per cent over the past two months.

The declines began after the company decided to hike prices for its U.S. customers by separating the DVD-by-mail division from the video-streaming division and charging for both, creating a fury among some that led -- naturally -- to slower-than-expected subscriber growth. On Sunday, the company's chief executive, Reed Hastings, issued an apology for raising prices without a full explanation for doing so: "We realized that streaming and DVD by mail are becoming two quite different businesses, with very different cost structures, different benefits that need to be marketed differently, and we need to let each grow and operate independently."

Still, some observers are perplexed by the moves, at least from a business standpoint. Abnormal Returns highlighted the fact that the company has been busily buying back its own shares, even as they marched to a record high of nearly $300 (U.S.) in 2011, when a better move would have been the opposite: Issue shares and use the proceeds to fund the transition from DVDs to streaming.

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"In short it looks like Netflix management began to believe their own hype as the stock ran from $50 to nearly $300," the blogger said. "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."

Megan McArdle at The Atlantic is also baffled. Perhaps, she said, the company is taking a "big bath" approach to its problems by making all the unpopular changes at once and getting them out of the way.

"So maybe the idea is that while customers are already mad, and analysts gloomy, you might as well make them as mad and gloomy as possible," she said. "The DVD business has to die eventually, so do what you can now to hasten the demise, even if it alienates a few more customers. Meanwhile, use the opportunity to herd Netflix customers into the streaming service, while creating a new brand eventually gives Netflix the psychological distance they need to shut the DVD business down."

However, she's not convinced that the approach is preferable to a series of more moderate moves that are less inclined to foment opposition to the company. With the stock down again on Tuesday, investors would tend to agree.

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More

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