03/17/2008 03:25 pm ET Updated May 25, 2011

Netflix Death Watch

As entertainment media delivery makes its slow march from physical distribution to online distribution Netflix (NFLX) has appeared to counter and even prosper in what would appear to be a gloomy business, that being the physical delivery of media. Netflix has over 8 million subscribers, increasing earnings, and the stock has gone from $20 to $34 in recent months, bucking the trend of the overall market. It basically is driving Blockbuster out of business.

So why my "Netflix Death Watch?" Two words: customer service.

I was on a conference panel recently with Lex Fenwick, CEO of Bloomberg. Someone from the audience asked him what type of business he would classify Bloomberg as. You would expect he would answer "news" or "content" or "media" or any assorted 2.0 buzzword. Instead he answered "We are in the customer service business."

I called Netflix recently to ask a question about my account and was connected to an indifferent and aggressive customer service rep. I figured it was an anomaly and called back. The next rep was also arrogant and rude, for no discernible reason. I called again, because now I was curious. Same result. I promptly cancelled my account, because life's too short and I watch too much TV anyway.

Customer service can be a leading indicator, despite what a company's stock says. Remember when Dell's customer service reps started getting uppity? That's about the time the stock topped. Tried Microsoft customer service lately, or Delta, Best Buy, Home Depot or AOL? Do you notice a common denominator? These once high flying stocks are now in the doldrums, their descent strangely correlated with a decline in customer service. Contrast this with Toyota, Southwest, GE or Apple.

In talks I give to business groups about Wal-Mart, I often point out that one of the only companies ever to beat Wal-Mart toe to toe was Netflix. A couple of years ago, Wal-Mart decided to enter the DVD rental-by-mail business and people assumed Netflix was doomed, given Wal-Mart's ability to scale its I.T. and distribution assets into new businesses, such as groceries or now health care. Wal-Mart had the added advantage of being the largest single DVD merchant in America. A year after Wal-Mart entered the DVD rental business, it threw in the towel and referred their customers to Netflix. I believe Netflix did this at the time through excellent customer service, which Wal-Mart is not famous for.

Netflix is now facing another challenge with the advent of a rehabbed Apple TV, Amazon Unbox, Xbox movie rentals and Playstation 3 rentals. Comcast is dead serious about radically expending their VOD library. Netflix is making some inroads in the digital delivery business, and there is a reason CEO Reed Hastings is now on Microsoft's board. But from personal experience and other anecdotal evidence I've seen, Netflix may be tossing away its most valuable asset, the one that allowed it to prevail against the world's largest retailer.

Note to Reed Hastings, call Lex Fenwick.