The Netflix Redemption


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One of the topics in last night's show on The Bean Cast was the recent decision by Netflix to raise prices for its monthly DVD-rental subscriptions by $6, and then to split its business in two due to the different models: DVD-rentals and streaming.

Due to the differences in first-sale doctrine applicability, the advantages Netflix had in the DVD-by-mail world go away in the streaming world. This is something the average customer would not know.

Action does speak louder than words, however.

The plot

A few weeks ago, Netflix caught heat for raising the prices of DVD rentals.

They tried to apologize to customers and made an even bigger mess for themselves. They are now splitting apart the business, launching Qwickster as its mail service and continuing Netflix as a streaming-only service.

While DVD-rental is still going strong and offers a greater title and genre selection due to its inventory and cost-effectiveness, this is a business that will experience decline with the increase of digital streaming.

One argument in favor of splitting rental from streaming is that by keeping the two businesses separate, content providers (the studios) will not be able to leverage one to negotiate higher margins on the other.

What Hastings meant to say…

Whenever, as a business, you depend heavily on the decisions of other businesses — in this case the studios — you will be called to making trade offs. Further, every time a business makes big changes to its model and pricing, it asks customers to make a stay/go decision. 

To me, the cost side of the equation and deal with studios was the real reason for the split. The biggest problem with Reed Hastings open communication to customers is that it doesn't really explain that. What it says is:

So we realized that streaming and DVD by mail are becoming two quite different businesses, with very different cost structures, different benefits that need to be marketed differently, and we need to let each grow and operate independently.

Without saying why. Then launching into the advantages of the split. All customers see, though, is the hassle of (potentially) having two accounts, without gaining an appreciation that the organization saw it as the best way to grow the business.

Qwikster, like the communication about it, looks like a harried (and I'm sure not easy) decision and is not winning friends and likes. Quite the opposite, in fact, as in many of the 27,000+ comments to Hastings post customers voiced their disappointment and complaints.

The problem with promises

Is that if you plan to trade on them, you better be able to keep them. Which means that as a business, you'll want to identify the model, what people exchange instead of the asset, and then work on figuring out how you continue to have people understand that.

Given the options provided, Netflix customers chose to keep all options open:

  • DVD-only (~2.2 million target for Q3, by far the smallest)
  • Streaming-only (~9.8mm target for Q3)
  • Hybrid (12mm target for Q3)

Although the company lost approximately 1 million customers to their subscriber base of 25 million due to the price hike in the summer, it still has a big base. As many video subscribers as Comcast cable.

In our discussion on The Bean Cast we addressed the following questions:

  • If this was the plan, shouldn't they have done this instead of the price hike? Obviously, they should have looked at the whole picture and considered having a plan in their communications with customers. Apologizing twice in a row for the same failure to communicate properly doesn't exactly win hearts and minds. It ends up losing credibility.
  • Doesn't this reveal that the company is reacting without a solid plan? Definitely they lack a communication plan. Being open and honest is not a strategy, it's part of the execution. And you will botch execution without a plan.
  • Is all this just confusing their customers? As a customer, I don't think you'd feel the love at this point. Netflix has a very passionate and loyal customer base. You expect a lot more from an organization whose services you evangelize (even when you don't buy directly from them).

Trust is hard won and easily lost. 

***

It used to be the darling of trade — for stock and customers alike. Praised for its long term strategy and vision. To me, Nextflix path to redemption is standing by its business decision and building a global product with its streaming business.

They will recover. Will they forget the business long term vision in favor of the demands of the market? What's your take?

 

[Image: Silicon Beat]

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