Netflix’s streaming business had grown so quickly by 2010 that the company had shifted its focus from being the fastest-growing customer of the United States Postal Service’s first-class mail service, to the largest evening traffic source for Internet streaming in North America.
The company subsequently introduced a standalone streaming service that was separate to its DVD rental division and on September 18th 2011, Netflix announced a plan to restructure its DVD home media rental service into an independent subsidiary called Qwikster.
By October however, Netflix announced that it was bringing its DVD service back under the name of Netflix and would not, in fact, create Qwikster – a complete turnaround that rounded off an annus horribilis for the tech favourite where 800,000 users unsubscribed from its services.
In early 2011, Netflix’s esteemed CEO Reed Hastings outlined his strategy for getting rid of the company’s DVD operation. Subscribers were to be informed that they planned to do away with its popular subscription that offered access to DVD rentals and unlimited on-demand video streaming for $10 per month. DVDs and streaming were to be separated and each would cost subscribers $7.99 a month, making a total price of $15.98 for both which represents a 60% increase.
The price hike and subsequent attempt to spin off the company’s DVD division so enraged Netflix customers that the company lost 800,000 subscribers, its stock price tumbled 77% in four months and Hastings went from being the poster boy of modern business innovation to a target of satire on Saturday Night Live.
In retrospect, what Hastings was trying to achieve at the time made sense. The DVD’s best days were behind it and internet video streaming was slowly beginning to replace physical media. Hastings wanted to get ahead of the game and focus entirely on streaming, thus disrupting his own business before someone else did.
Despite it being an aggressive move, Hastings had the pedigree and experience when it came to disruption having driven former giants of video rental out of the sector with a simple-to-use web site that delivered DVDs to your doorstep and more importantly ditched charges for late fees.
Hastings had an evangelical belief that video streaming was the future of home entertainment. The tech CEO argued that during times of great technological advancement, the winners often cling religiously to the methods they initially used to become successful and inevitably end up outdated and outmanoeuvred by competitors as a result of their unwillingness to innovate. Hastings was adamant this would not happen to Netflix. Whilst key executives at the time agreed with his theory, there was disquiet among some as to how quickly the changes needed to take place.
Netflix’s streaming video platform was compatible with hundreds of handheld devices. Some of these gadgets enabled the company to offer numerous ways for customers to watch Internet video on their televisions and as a result, rivals found themselves left far behind as the popularity of streaming exploded in 2010.
Hastings believed Netflix had to continue moving fast. Company data showed that the interest in DVDs was declining – that people preferred the instantaneous nature of streamed video. If Netflix didn’t cater for this need, someone else soon would so the big question became ‘how quickly should they move?’ Go too fast and you alienate your customers. Too slow? You might lose them to a competitor.
“DVDs are a cash cow for Netflix,” one high ranking executive said at the time. “Why would you kill off that business before it’s harvested? Consumers weren’t looking for Reed to get out of the DVD business. They were just looking for more streaming content.”
As Netflix announced its price hike, Critics quickly seized on the 60 percent increase for customers who wanted both DVDs and streaming. Subscribers angrily lashed out at Hastings on social media and The CEO earned himself the nickname: “Greed” Hastings.
The Netflix PR team attempted to respond by clumsily saying the increase was equivalent to a couple of Starbucks lattes. They also highlighted all the on-demand movies and TV shows that were available anytime on the service but customers didn’t respond accordingly.
On October 24th, Netflix revealed it had lost 800,000 subscribers in the quarter up to September 30th. Before that, the number of Netflix subscribers had been growing by at least 1 million in each of the previous seven quarters.
In the three months subsequent to the price hike, Netflix had lost three-quarters of its value as the company’s shares continued to nosedive.
Netflix had lost its direction. The company had built a substantial business based on subscriptions, but the number-one rule of subscription businesses is: It’s all about the relationship with customers. When Netflix took a unilateral decision to change that relationship without consulting the other side, they got more than they bargained for in response. The trust had gone and subscribers voted with their feet.
These days, Netflix is recognised as a remarkable business innovator but in 2011, the company almost killed itself because it stopped thinking about its customers. It forgot that relationships are a two-sided affair. It was the wake-up call the company ultimately needed and is the reason why they are so successful today.
In fairness to Reed Hastings, W1nners’ Club Publisher Darcus White also considers himself to be a bit of a visionary. The problem is that he’d probably be quite happy to lose 800,000 customers in a quarter because it would mean there had been 800,000 customers in the first place and he’d start wandering around the office chanting the phrase ‘the bigger they are, the harder they fall,’ whilst brandishing a county court summons or something ridiculous……