My Thoughts On The Uproar About Netflix

Netflix recently announced that it is splitting its business into two pieces: 1) DVD by mail (now called “Qwikster”) and 2) streaming media (called “Netflix”) and changing its prices. There was a sizable reaction to this move, from subscribers and shareholders. As a result, Reed Hastings, the CEO of Netflix, sent a note to customers and issued his thoughts in a post called An Explanation and Some Reflections.

My take: This move shouldn’t be seen as a surprise, but as a natural evolution for Netflix. The DVD and streaming operations are completely different businesses, with quite different economics. The DVD business is an distribution-intensive business with high marginal costs associated with the movement of physical DVDs. The streaming business is a technology-intensive business with high infrastructure costs, but low marginal costs.

In addition to the difference in the models, the two areas are at different points in their maturity. The streaming business is much earlier in its lifecycle and looks to have significantly more future growth.

So Netflix needs to develop and execute quite different strategies for each of these businesses. Trying to keep parity in the pricing would either make it too expensive to capture its desired share of the growing streaming market, or too cheap to cover the DVD shipping costs (with appropriate margins). The decoupling of these businesses allows Netflix to develop and execute appropriate strategies for each of them.

When it’s all said and done, I don’t think Netflix will lose many customers and investors will applaud the move. But there are some very important lessons that we can learn from the intense reaction:

  • Customers don’t like price increases. No matter how Netflix had announced this change, customers would be up in arms about the price increase to the DVD offering. Sometimes it’s just best to “pull off the band aid” and live with the quick, short-term pain of the reactions. Since businesses often need to increase prices, you have to live with some short-term negative responses.
  • You can’t always listen to customers. As I mentioned in a previous post about Steve Jobs, businesses can’t always make decisions based on customer feedback. Customers are almost always reluctant to change. If your business environment is changing rapidly (as it is for Netflix), then you might need to do something that customers won’t like in the short-term.
  • Investors overreact. This is my observation. Whenever there is something that appears to be negative news, the stock market seems to overly discount a company’s worth (it also works a little bit in the other direction as well). When you make a key strategic decision, don’t pay attention to your stock price for a month.
  • Communicate, communicate, communicate. I love this line by Hastings: “Actions speak louder than words. But words help people to understand actions.” Hastings and Netflix could have done a better job of being more proactive in their communications.

The bottom line: Sometimes success in the future requires letting go of the past

About Bruce Temkin, CCXP
I'm an experience (XM) management catalyst; helping organizations improve results by engaging the hearts and minds of their employees, customers, and partners. I enjoy researching and speaking about these topics. I lead the Qualtrics XM Institute, which is the world's best job. We're igniting a global community of XM Professionals who are inspired and empowered to radically improve the human experience. To achieve this goal, my team focuses on thought leadership, training, and community building. My work is driven by a set of fundamental beliefs: 1) Everything starts and ends with human beings, so you need to understand how people think, feel, and behave; 2) XM is a discipline that needs to be woven throughout an organization's entire operating fabric; and 3) Building the XM discipline requires a combination of culture, competency, and technology.

6 Responses to My Thoughts On The Uproar About Netflix

  1. Communicate, communicate, communicate…

    That was the fundamental problem with Netflix on this one, and why they’re taking a drubbing over all this change. They weren’t honest at the time of the reasoning behind the price increase – now they’re madly trying to undo their communication mistake. As a customer, I think it’s too late – they haven’t lost me yet, but it’s just a matter of time.

    I suspect that the loss of content that’s going on behind the (streaming) scenes will ultimately be the undoing of Netflix. It’s getting harder and harder to actually find something to stream – so perhaps hedging their DVD bet with Qwikster may have been a good idea.

    So to your #4 point, if the Reed Hastings note came out when they split the service, we wouldn’t be having this conversation. We’ll see how this plays out, but #customerexperience on this one stinks.

  2. Andrew Waber says:

    While its obvious this could have been communicated to customers a bit better, I always thought the biggest problem with the change wasn’t the price increase or the decoupling of the businesses, but moreso the complete disintegration between the two. The name change makes it easier for people to compare competing services, plus the queue being interoperable for both physical and streaming services would remain an instant selling opportunity. ‘Qwikster’ is giving away a lot of goodwill Netflix has built up since their debut and they’re going to be largely starting from scratch. Subscribers were their most valuable asset in order to force the issue with operators and content providers. Without that stranglehold on the market their days are numbered.

  3. Lauren Schreiner says:

    Hi Bruce,
    I agree with your assessment of Netflix’ situation, but I had to chuckle at the misspelling of “parity”, as for many consumers the decision to decouple their services/raise prices feels like a “parody” of their customer-centric brand promise.

  4. Bruce,
    As a customer experience guru I am shocked that you ignore the impact of decoupling the two businesses. It not that they are separating them. It is how the front end will be presented to customers – two separate websites each with their own silo’d queue. One of the great value propositions Netflix offered me was the ability to see if the movie in my DVD queue was immediately available to me via streaming. It seems to me this benefit will disappear.

    Now Netflix has removed a unique value proposition for its streaming business and made it only able to compete against Hulu and Amazon based on content and stream quality.

  5. Bruce Temkin says:

    Thanks for all of the comments. I think there was a clear misstake in how NetFlix communicated, but I’m not sure it would have changed the reaction of customers. The company is positioning itself to best serve its growth market (streaming), which is forcing it to do some things that are sub-optimal for some existing customers (as Trevor describes). This would be a very tough type of transition for any company, and most fail.

    I think that Netflix is becoming brutally focussed on the streaming model in order to give it the best chance to succeed. By splitting the company, DVD customers will at least get the full focus of Qwikster and not become the neglected, unwanted stepchild within Netflix. But it does come at a price, especially for customers who found value in the joint offering.

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