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Netflix was on top of the world on March 17, 2011 after they announced the exclusive rights to a new series called "House of Cards". The announcement was seen as a game changer. Netflix was no longer just another distributer of content. Netflix was now a content provider. The move placed Netflix in direct competition with cable channels like AMC, FX, HBO and Showtime. The stock market loved it, though there were rumblings about the price Netflix was paying to become a content provider.

Fast forward to this past summer and the bombshell announcement from Netflix CEO, Reed Hastings that prices for the combined DVD and streaming services were going to go up 60%. Users were left with the choice of reducing their service to either DVD only or streaming only at lower prices, or accept the price increase for both services.

A few weeks later after customer defections and a drop in stock value, Hastings made another announcement that the DVD service was going to be spun-off as a "new" company called "Qwikster". Users of both DVD and streaming services would be required to maintain two accounts, two queues, and two review histories. The gist of Hastings' message was to suck it up if you wanted to continue using Netflix and Qwikster to satisfy your movie fix.

Hastings made another announcement last week that the Qwikster initiative was dead. Netflix will remain the one source for DVD and streaming services. The price hikes will remain, and Netflix will still treat the two services as separate businesses behind the scenes, but the customer experience will remain the same. Netflix stock sat at nearly 50% of what is was at the beginning of summer. Netflix' fall from grace was now complete, but what went wrong?

First, Netflix took their customers for granted. Until recently, Netflix was highly regarded by users. The website was easy to use. The movie suggestions were relevant. The movie library was enormous. But most of all, the service was convenient and affordable. One of the things that distinguished Netflix from Blockbuster was the convenience of the service. Customers could keep a DVD as long as they wanted with no late fees. Blockbuster soon caught on, but they could not catch up. Blockbuster had fomented too much bad blood with customers to win them back. Netflix subscription numbers grew exponentially. Customer satisfaction was high and users were happy. Then the infamous announcement was released.

The tone of the announcement for the DVD and streaming service split and the new pricing for the combination package was unapologetic and cavalier. Netflix basically said "This is what we are doing like it or not". It seems that they never really considered how customers would react to the service changes and pricing. They also were not very concerned with losing customers to competing services.

As criticism and account cancellations mounted, the stock price dropped. Hastings released the "apology" and Qwikster announcement. The spin-off of the DVD business was unpopular with all Netflix users. Especially the part about two separate accounts, charges, passwords and queues. Hastings even acknowledged that the changes would be inconvenient for users of both services, but Netflix was going to go ahead anyway. Netflix knew that customers would be unhappy about the changes, but wasn't going to deviate from the course it set. These are not the actions of a company that values its customers.

Next, Netflix overestimated the value of its streaming service. Netflix currently offers nearly 5 times as many DVD titles as streaming titles. They are working to expand the streaming library, but for now, the average user with 20 or more titles in their queue, could only see three or four of those titles instantly. Where is the value to customers for paying the same or more for less?

Netflix also did not factor in the hidden cost of the unlimited streaming plan; overage fees due to metered band-width. The two biggest high-speed internet providers, Comcast and AT&T have implemented bandwidth limits for all customers. The limits are generous, but most customers have to be cautious about going over. Customers who view 8 streamed titles or more a month risk exceeding their limits and paying penalty fees. Did Netflix really expect that customers would forgo the affordable DVD service for a potentially costlier streaming service?

Finally, Netflix failed to learn from history. This is the most puzzling aspect of Netflix' fall. Blockbuster customers were unhappy about late fees and the inconvenience of their services. Netflix lured them over and made them happy. Blockbuster went bankrupt. Netflix won. Now Netflix is making its customers unhappy and can't comprehend why they're unhappy.

In the meantime, other's are quickly stepping in to lure customers away. And customers are leaving. Many of those that are staying have chosen one of the cheaper DVD or streaming only service. The bottom line is that Netflix is losing customers, income and stock value. Now it's just a question of whether the damage can be overcome. The way Hastings has responded so far, I would say that the answer is no.

Posted under Caught in the Web on Thursday, October 13th, 2011 at 15:43

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