Netflix, HP: What have we wrought?

In a year whiplashed by market volatility and economic worries, it isn't unusual for hard questions to be asked of companies' management. Where's the growth? How do you plan to improve shareholder value? But rarely is there a vocal chorus of "What the hell were you thinking" that echoed as loudly as it has several times this year.

The most glaring example was provided by Netflix Inc., the provider of hugely popular DVDs-by-mail and streaming video that announced in July, via a blog post penned by founder and CEO Reed Hastings, plans to hike its fees by 60% and separate the services into two distinct plans. Angry customers lit up the chat boards, and the market began to respond, slicing Netflix's once high-flying stock nearly in half. A couple of months later, Hastings apologized for the way his company introduced the separation and price hike, but subsequently announced that the soon-to-be-separated DVD rental unit would be called Qwikster, a name instantly ridiculed. Less than a month after that, Hastings called off the whole DVD-streaming split (though not the price hike). Netflix shares have fallen from a high of $304.79 in July to a recent price of $64.53.

"It was just arrogance," says one Wall Street analyst who covers Netflix. "Stupid decisions get made when no one stands up to provide a reality check to the boss."

Big errors are also made when a company that has long enjoyed a solid leadership position, like the one Netflix has occupied for most of its 14-year life, hastily moves to reposition itself for growth when the competitive landscape shifts. This presents a challenging set of options -- move quickly and risk making a knee-jerk reaction, or wrestle with one's direction, as Yahoo! Inc. has done during the past three years since it rebuffed a $33 per share takeover offer from Microsoft Corp.

As of this writing, long-struggling Yahoo! was trying to negotiate its own slow turnaround, having reportedly returned to the negotiating table to entertain acquisition offers from private equity firms -- some of which were working on joint bids with Microsoft -- for half of what it could have sold for in 2008.

Corporate reversals are hardly unusual. As the mantra goes, most big acquisitions do not live up to their initial billing, and acquired technologies or product lines often get phased out or sold off for pennies on the dollar. In the spring, Cisco Systems Inc. pulled the plug on much of its consumer operations, erasing hundreds of millions of dollars worth of acquisitions. The company admitted it had lost sight of its fundamental business of making networking equipment for business customers, and quickly set about reorganizing.

But rarely do these public bouts of managerial delusion happen with such temerity and apparent disregard for the reactions of customers and investors as they did with Netflix. Never mind the name "Qwikster"; customers were angered at the huge price increase and the brusque way Hastings unveiled it. The executive's long-standing status as a tech superstar quickly faded, and now Netflix has been labeled by some observers as a broken company.

Then you have Hewlett-Packard Co. Its then-CEO, Léo Apotheker, announced, simultaneously with a very high-priced agreement to buy enterprise search software maker Autonomy Corp. plc, that it was considering a sale or spinout of its market-leading, $41 billion PC unit. Observers scratched their heads, criticism poured in, and Apotheker was out after less than a year in the job. He was replaced by former eBay Inc. CEO and failed California gubernatorial candidate Meg Whitman.

"People get paranoid about how customers and employees and investors will react," says one corporate development executive. "The first inclination is to keep things tight and keep the plan to a small group of people, but then you also don't get enough people thinking about what might happen."

To that end, it could be argued that Apotheker wanted to vet his PC plan with the public on his own terms instead of grappling with the results of leaks, for which HP is well known. But it left him without a job, and left his replacement in the somewhat enviable position of killing off a bad idea that wasn't hers.

In the cases of Netflix and HP, the moves had little to do with faulty prognostication about where the market was going, but rather an insular management attitude and hubris.

For Cisco, the swift, decisive moves to get back to basics have won over those worried about its future. Even HP, which exhibited an embarrassing amount of indecisiveness in the way it handled the nonsale of its PC business, has taken at least a small step back into Wall Street's good graces. In November, after sending HP's longtime head of strategy and technology Shane Robison packing, Whitman promised to spend more on R&D and less on splashy, big-ticket acquisitions. Which is probably a good thing, given her track record with eBay's failed acquisition of Skype Technologies SA.

"Management is focused on operating the businesses that HP already owns, not lusting after acquisitions," says Morningstar Inc. analyst Michael Holt. "Investors finally have reason to be optimistic as Whitman looks to restore order from the chaos."

For Hastings and Netflix, the future is less clear, especially with competition coming at the company from all sides. As one analyst described it, Netflix's current attitude is "growth at all costs." Beware of another sudden U-turn.