Netflix - A Classic MBA Case Study

Netflix

reported earnings on Monday after market hours, and the picture was not pretty at all. While its $1.16/share quarterly earnings and revenue of $821.8 million beat expectation, its

. The company had lost 800,000 customers in the last quarter, and projected a 2012 loss due to its international expansion plan. The downward spiral of Netflix began when the company first unveiled its price change,

to cost $7.99/month each instead of the original bundled pricing of $9.99/month. The change caused quite an uproar from its customers, but it was nothing compared with its announcement that the

, and its customers would be dealing with two different services. A month later, Netflix realized it was a bad idea, and scrapped the Qwikster plan. However, it had greatly damaged the goodwill of the company for a lot of its loyal customers. This has been quite a text-book case of a successful company making plans affecting their vast customer base without getting much feedback from them in the first place. Most of the pain is self inflicted, but it also highlighted some of the underlying issues many bearish investors had pointed out before: rising content cost, unrealistic subscriber growth projection, etc. This will certainly be an important case student for future MBA students. However, the most valuable lesson MBA students can learn from Netflix was how difficult it was to be a short seller. Many investors had shorted the stock as its valuation got frothy in the past two years. Nonetheless, the market ignored them and the stock kept going higher, thus forcing many of them to cover their positions, which forced the stock to go yet higher again. The battle between long and short investors in the company was highlighted by the duel between Netflix's CEO, Reed Hasting and hedge fund manager, Whitney Tilson, when Hasting

to Hasting's reasoning of shorting Netflix. Not long afterward, Tilson gave up and

. The stock kept charging higher until July, but once bad news started, there was no more short sellers to be counted on to cover the stocks. People who shorted only recently might have made money, but those who shorted early, and there were a ton of them, would had been right and proceeded to lose a lot of money. In a way, both the great ascend of Netflix's stock and its current decimation right in front of our eyes could be the the functions of short sellers. For someone who had lost quite a bit of money on shorting Netflix, Whitney Tilson, is

. Let's hope he is not too early this time.