Netflix In 2011: How To Build Up, Then Destroy A Company In 12 Months

Wednesday, December 28 by
This year has left the juggernaut broken, battered, and bruised.  

2011 will be known as the year of Blockbuster’s death rattle. The cultural staple, having lost its way with misguided marketing decisions, the arrogant belief that their customers would remain loyal despite better alternatives, generally misguided tactical decisions, and technical advances beyond their control ceded the home video industry to to the likes of Redbox, Hulu, OnDemand, and most notably, Netflix.

Strangely enough, 2011 may also be viewed as the year of Netlfix’s demise as well, comically enough, thanks to misguided marketing decisions, the arrogant belief that their customers would remain loyal, and generally misguided tactical decisions. What’s more spectacular about Netflix lost market share and plummeting stock price is the fact that there existed no better alternative in 2011, unless you count black-market torrent sites, which aren’t popular enough (yet) to explain for the constant barrage of hits that 2011 brought to Netflix.

The revolutionary company, which made its name with DVDs-by-mail, had climbed another mountain with its Netflix Instant service, which was originally available as a perk to mail subscribers. Instant became a star in its own right, allowing users to forego the three-day turnaround and watch films and TV shows whenever they wanted.

In March, Netflix announced that it would be getting into the business of original programming, with an ambitious original series from no less than David Fincher and Kevin Spacey called House of Cards. They paid $100 million for 26 episodes of the show, which focused on British politicians clamoring for power at the end of Margaret Thatcher’s term. That link will take you to an article I wrote that begins with “Netflix continues to make the competition look silly…” The company was finding new ways to vertically integrate and looked to solidifying its position for years to come.

Threats from Hulu and OnDemand were present, but those served (as the continue to do) more as services for viewers to “catch up” on recent TV and movies rather than they did as an exhaustive archive. For that matter, Netflix’s online library was far from exhaustive, but it seemed to be growing, despite a constant ebb and flow of available programming due to the expiration and renewal of licensing agreements. For instance, a week after the House of Cards announcement, Showtime pulled several of its shows out of fear that their presence on Netflix was making subscription to their cable channel obsolete. Though the move dealt a blow to Netflix, it was further a sign that their business model was defeating the staid model of premium cable subscriptions. It was looking like even basic cable subscriptions were being cancelled in favor of the Internet/Netflix model that allowed users to pay $15/month rather than upwards of $50.

The next month, Netflix showed exactly how powerful they were by dropping $100 million for the rights to the most prestigious show on television – Mad Men. On April 8, the Friday after this announcement, their stock price was at $235 per share, peaking at $299 dollars on July 13, the day after the company announced that they were splitting their by-mail and Instant streaming services. A subscription that allowed users unlimited streaming and one DVD at-a-time that had cost $9.99 would now be two separate subscriptions costing $7.99 each. I defended the move, claiming that it still served as a great value, and the increased fees could result in a better library of streaming shows, ultimately behooving streaming customers by further reducing their dependency on subscription and even network television.

Customers contended that Netflix’s price hike was an abuse and cancelled in mass. 800,000 subscriptions were cancelled. This surely didn’t come as a surprise to Netflix, as any company as large as theirs must have realized that demand would fall after a 60% price hike. However, the company acted as though the cancellations and vitriol were completely unexpected, and reverted to a strange damage control mode.

Netflix strangely decided to announce this price hike as it would engaged in a bitter battle with studios over content rights, so right as subscribers learned that they would be paying more, they also learned that they would be offered less, as Sony pulled all their titles. Analysts projected that streaming licensing rights that had cost the firm $180 million in 2010 would tally up to $1.98 billion in 2012.

Ultimately, what was to be an unpopular, but smart business decision, turned into a public relations issue that needed to be dealt with. And deal with it they did. Netflix’s knee-jerk reaction was, for reasons indeterminate even now, divide their brand into two completely separate companies and experiences. Netflix would be the streaming brand, while the by-mail component would be called Qwikster. They would operate independently of one another, with customers forced to provide separate billing info to both. This decision was impossible to analyze, as it seemed to pile on further inconvenience and generate less customer goodwill for a company that was in dire need of satiating its customers.

But not a single kernel was popped.

On October 10th, about three weeks after the Qwikster announcement, Netflix announced that maybe that Qwikster business wasn’t a good idea, and that the structure of the site would stay as it was, but so would that rate hike from July. This decision transitioned Netflix from a company that made a marketing error to a laughing stock. The fact that this announcement was the correction of an unpopular decision didn’t matter. Netflix stock closed that day at $112 bucks, or just more than a third of where it was three months prior.

The company continued to lose content during this period, with Starz pulling their content in September. Going into this month, December of 2011, Netflix continues to lose customers, which is more ominous than it may sound, due to the fact that the firm probably expected an exodus after its price hike in July, followed by supplication after customers explored the landscape realized that the firm was still a value.

Without subscriber growth (and probably further price hikes), Netflix won’t be able to afford licensing renewals for the shows it has under contract, resulting in a diminished library, resulting in lowered demand, creating a death spiral for the company.

2011, promised to be the year Netflix furthered its stranglehold on the evolving industry of home video, and they were tracking very well over the first half. However, bad timing in the announcement of a price hike, in conjunction with some panicked decisions that shook the public’s faith in a company once considered to be the savior of home entertainment, has opened up the field once again, to Netflix’s detriment. The stock price currently at $70, off 75% of its year-high.

Without some drastic innovations and inspired practices, the future looks bleak for Netflix. Progressive practices and prescient outlooks made the company what it once was, but even if the company can invoke them, is it enough to bring the company back again?

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