Felix Salmon on the implosion of Netflix

Felix Salmon has a great post up on Netflix. You should definitely read the whole thing but this passage in particular caught my eye:

In hindsight, it’s pretty clear that Netflix CEO Reed Hastings let the bubblicious stock price — it briefly topped $300/share at the beginning of the quarter — go to his head. The company was swimming in money! And so, in September, Hastings signed a deal to pay $30 million per movie for everything that DreamWorks creates, in return for the right to stream those movies a few months after they’re released on DVD. It’s known as the “pay-TV window”, and in order to wrest those rights from HBO, Netflix had to outbid HBO, which was reportedly paying something in the neighborhood of $20 million per movie.

There is a huge hype machine out there, powered by a symbiotic PR/press relationship and focused on selling tales of visionary CEOs. These stories are almost always incredibly distorted. In all but a handful of cases, these superstar CEOs are simply competent executives who had two or three good ideas and a great deal of luck.

When you're at the center of all that myth-making (as Hastings was), it can be difficult not to start believing it. When that happens, bad decisions inevitably follow. We've all heard about Hastings' disastrous attempts to wreck a perfectly good business model but I think this example (again from Salmon) might just be more telling:

Maybe the company shouldn’t have spent $40 million, over the course of the third quarter, buying back 182,000 shares at an average price of $218 apiece. (In the wake of today’s results, they’re trading in the $80s.)

While you're there, check out Salmon's tremendously informative discussion of the dynamics of Netflix's stock swings.