Monday, October 10, 2011

Netflix's implosion

As we have discussed previously, the video rental market has changed dramatically over the past few years, as is particularly evident by Blockbuster's recent deceleration of bankruptcy.  One of the primary reasons for this change was Netflix.  The mail- and streaming-rental service took the market by storm and was seemingly on top of the world.

Then, over the course of the summer, Netflix has managed to, in spectacular fashion, lose its grip on the market.  Here's a brief history on what happened and what can be learned from Netflix's missteps.

A Brief History
Until July 12, 2011, Netflix charged $9.99 for unlimited video rental by mail and streaming services.  Then, in July, Netflix changed it's pricing, pretty dramatically:

  • The charge for both services would jump to $15.98.
  • DVD rentals jumped to $11.99 per month (for two DVDs at a time) and 7.99 (for one DVD at a time). Streaming started at $7.99.
Netflix said the changes would be instant for new users and rolled out September 1 for new users.  They said the switch was to better reflect prices and give customers more options.  The backlash was almost instantaneous, sweeping over Social Media and damaging Netflix's reputation and stock price.

Then, on September 1, Starz announced it would no longer stream movies through Netflix, effective February 28, 2012.  

In a blog post by its CEO, Reed Hastings, apologized for the tumult around the price hike and announced that Netflix would split off its streaming rental company as Quikster.  Less than a month later, today, Netflix said "Never mind!" and announced it would keep streaming DVDs under Netflix.

All of this took its toll on Netflix.  Netflix has said that it expects to lose one million subscribers and its stock has dropped from a one-time high of $299 to $117.21 as of this writing.

Lessons

1.  Don't move to fast:  Netflix tried to rush a price hike through without adequate notification and feedback from its customers.  Price hikes are always ready, but phasing them in (especially if they are as large as this one was) is a better strategy.

2.  Be upfront and transparent with your mistakes:  This is probably one of the things Netflix did really well - in his apology note, CEO Reed Hastings was upfront with Netflix's errors and noted that the company had "slid into arrogance based upon past success."  Hearing such contrition from the company CEO is wise.  

3.  Don't compound your mistakes: In the same graceful apology note, Hastings announced the creation of Quikster, a separate, streaming service.  The response was almost identical: HUH?  The move made no sense and seemed designed to camouflage the price hike - and this is likely why the move was rescinded earlier today.

What do you think about all of this?  What could Netflix have done differently?  Let us know in the comments!

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