More Smoke and Mirrors at Netflix

NEW YORK (TheStreet ) -- For around a year, Netflix (NFLX) CEO Reed Hastings floated the notion of a "virtuous cycle" operating within his company's streaming business.

We get more customers, we get more money, we can afford more content, we get more customers. - Reed Hastings, June 2011

Of course, that blew up in his face last year when he unveiled Qwikster and angered subscribers with a poorly executed price increase. I was never really all that hard on Hastings and Netflix for last year's well-publicized errors. In fact, to this day, I consider them a strange positive for Netflix.

Since last April, I have been yowling about Netflix's broken and unsustainable business model. There was no question in my mind that costs would consume the company, regardless of subscriber growth. No matter how hard Netflix tries to sell it as such, digital content spend is a variable, not fixed cost, at least if Hastings wants to obtain the quantity and quality of content necessary to bring in new customers.

Although Netflix can budget a particular amount of money for content each year, the strategic reality on the ground clearly shows that content creators can effectively force the company to spend more to secure content that it would like to have. While financial discipline can be a good thing, every time Netflix refuses to spend, it runs the risk of a sub-par streaming offering, which will do anything but drive new subscribers.

That aside, the so-called "virtuous cycle" was doomed before it didn't really even get started. Subscriber growth at Netflix would have had to progress onward and upward, unabated, for years, if not forever, for the company to truly execute a virtuous cycle. Ask Time Warner's(TWX) HBO, Sirius XM(SIRI) , DirecTV(DTV) and DISH Network(DISH) , even when you actually offer premium content, it's next to impossible to penetrate the majority of a population's households. That's basically what Netflix needs to do at $8 a month.