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Netflix: The Saga of a Company that Needs Your Love

It's been nothing short of astounding to watch this once-strong comapny implode so thoroughly. 10/17/2011 9:49 AM Eastern

Netflix: The Saga of a Company that Needs Your Love

Oct 17, 2011 1:49 PM, by Jason Bovberg




Last week, I came across a typically perfect satirical news story from The Onion. The title was "Netflix Switches Over To Convenient New Physical Locations." Compared with Netflix's business decisions of the past three months, the suggestion that the company begin opening brick-and-mortar locations seems pretty market-savvy. It’s been nothing short of astounding to watch this once-strong—seemingly invincible—company implode so thoroughly.

I was a late Netflix subscriber, having joined in March 2011, finally, at the insistence of friends and family. I quickly came to see the value of the service, even though I had been a long-time customer of a favorite local video shop. But even as I held firm to my twice-weekly drives to my local mom-n-pop shop, I could feel the winds of change buffeting me, and when that store quietly shut down, I gave in and tried Netflix. I haven't looked back since. The company immediately made an impact in my home theater, saving me gas money and introducing a new convenience to my rental habits. I'm sure most of you have similar Netflix tales of convenience and comfort. Ahhh, Netflix.

But then July happened.

From the perspective of the customer, Netflix seemed to endure a three-month self-destruction the likes of which we rarely see. Just as customers were starting to get curious why Netflix was scaling back on some of its on-demand content, the company made the startling announcement that it would be dramatically increasing its prices. The streaming-only service would remain $7.99, but a now-separate DVD-only plan would also cost $7.99, which meant that customers who wanted both services would be seeing a much larger Netflix bill each month: $15.98 per month for two separate services, and an extra couple bucks for Blu-ray.

Complaints were vociferous. Users were livid, feeling personally affronted by the changes. The national conversation became, "Which Netflix service(s) are YOU dropping?" Netflix subscribers had traditionally been a loyal, almost Mac-like audience, but this one announcement changed the game. Since July, Netflix has lost over 60 percent of its value. Which is somehow appropriate, given that the spark that began Netflix's precipitous decline was an announcement that it would be increasing its prices by just that—60 percent—for subscribers of both its disc-rental and streaming services.

All because of a bungled announcement!

Netflix, after all, has been and remains a great company. For years, it has been a model business, providing exceptional service and incredibly low prices. Its highly regarded DVD-by-mail service was a pioneer in the industry, as was its wow-factor streaming service, which—thanks for the detail-oriented tech team at Netflix—stayed ahead of the pack. And the company was paying its online-content distributors incredibly low fees while delivering this world-class on-demand service.

Customers didn't realize it, but they were getting an even better deal than they realized. For a paltry sum, the average Netflix subscriber could watch high-value content on any device in their home—streaming or physical media—at all hours of the day. A constant stream of TV series and high-def movies and standup routines and concerts and documentaries, blasting at you from all directions, all for less than 10 bucks a month. It was only natural that Netflix subscriptions exploded between 2008 and 2010 by more than 50 percent. Shares of Netflix stock soared from $19 in 2008 to a whopping $295 at the start of 2011.

Of course, that wonderful dream couldn’t last, but it’s sort of amazing how quickly the dream became a nightmare.


Netflix: The Saga of a Company that Needs Your Love

Oct 17, 2011 1:49 PM, by Jason Bovberg




Netflix finally came to a point at which it was facing a new reality. Competition was rising, and distributors were no longer so amenable to low, low rental fees in the face of giant Netflix profits. One big distributor in particular was on the chopping block. And it goes without saying that customers had become—let's not use the word spoiled, but instead let’s just say we all became quite comfortable with the extreme bargain we were collectively enjoying.

How would Netflix raise prices in such an environment? Gradually, right? Explain the situation from a common-sense position, and gently introduce new tiers of pricing over time. Be realistic. Customers would understand.

Well, we all know what happened. The sudden announcement came as a slap in the face to Netflix's comfortable audience, and they started canceling subscriptions. In a remarkably short amount of time, one of the most beloved of all media companies became despised!

Perhaps feeling that his company could do no wrong, CEO Reed Hastings could only stare at this change of fortune in a state of shock. And perhaps in a misguided attempt to clarify the new business model, he quickly announced that he would be separating the DVD-by-mail service from the streaming service, and labeling the new physical-media company Qwikster.

If the price increase was a slap to the face, this move was the mortal blow to the chest—or, would have been, had the decision remained in effect. At a vulnerable moment when Netflix was witnessing a fracture of its business, its solution was to actively take part in the fracture and increase the injury? It wanted to actually remove its tried-and-tested brand from half of its movie service? Blood was already seeping, and now it threatened to gush.

In an almost immediate attempt to stanch the flow, Hastings pulled back on the Qwikster decision, perhaps saving the life of Netflix.

But Netflix is still in a tough situation. It now faces not only the new market situation that had become a reality before its back-to-back bungled announcements, but also a new reality of customer mistrust and volatility. If only the company had just been honest from the start!

Streaming content ain't a cheap proposition. And mailing discs is increasingly expensive. You can practically feel Hastings' anguish at these new realities. He's got a mob of about 20 million members glaring at him—customers who recently loved him!—and they’re all just waiting for more bad news. These people used to constantly recommend his service, and now nobody does.

Personally, I've moved to a more forgiving, understanding stance. I've kept both my streaming and Blu-by-mail options, and I've educated myself about the distributions costs that Netflix faces. I'm happy to pay the price for that content—and even more, as the streaming selection increases. And I'm more than happy to hang on to that disc-by-mail option, which continues to be the most essential aspect of Netflix to me.

I just can't help but feel bad for Mr. Hastings, who made an all-too-human error and will suffer the consequences of that error for too long.


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