In these recessionary times, the stock market doesn’t get nearly the attention that it did back in 1997 when Netflix was founded and every dotcom was looking for a big initial public offering. But if you’re the head of a publicly traded company stock price still matters a lot.
Just ask Reed Hastings, the CEO and co-founder of Netflix. On Sunday, he attempted to address the decline in stock value his company has undergone since announcing a new pricing structure in July. Following what’s become the standard social media playbook for restoring customer trust after a corporate blunder, he wrote a post that sought to be contrite about past mistakes and transparent about future plans.
The result? On Monday Netflix stock dropped a whopping 7.37% on a day when the exchange it’s traded on only dropped 0.36%.
On second thought, maybe that blog post didn’t actually matter since the last three days of trading saw Netflix stock drop 31.56%. That’s part of a total decrease in stock value of 43.36% since the company announced its new pricing scheme. Granted, this time period includes some big drops in the the composite stock indexes too, but nothing approaching the drubbing Netflix has taken.
Before July, it looked like Netflix had sewn up the market it pioneered by freeing customers from trips to the video rental store. Now, it doesn’t seem unreasonable to ask if the recent missteps have permanently damaged the company’s future as its customers air their displeasure. Even worse for Netflix many of them seem to be leaving in protest, perhaps sampling competing services from Apple and Amazon.
What exactly did Netflix do? First, they raised prices for the popular 1 DVD at a time rental plus unlimited streaming plan by 60%, from $9.99 a month to $15.98. That’s when the first signs of customer revolt started.
Personally speaking, I wasn’t especially concerned about the increase. Yes the percentage was large but the dollar amounts were still fairly small and many of the complaints I heard reminded me of comedian Louis CK’s rant “Everything is Amazing Right Now and Nobody’s Happy”, in which he skewers the human sense of entitlement for things such as complaining about the hassles of air travel instead of appreciating the miracle of flight.
16 bucks a month for unlimited access to Netflix’s streaming library, plus the ability to get DVDs not available online delivered to my mailbox? Amazing! It seemed Netflix was moving us rapidly towards the magical world of “Any Movie Ever Made” that was portrayed in a TV commercial for Qwest broadband 12 years before.
Apparently not everyone shared my lack of concern over the price jump. On September 15, the company issued a note to shareholders (PDF) that warned it was revising its growth projections. In fact it wasn’t projecting growth at all, but actually acknowledging that in the wake of the price increase, Netflix had lost a million customers. Of course a million is a lot, but the company still has more than 20 million who haven’t left. Even if Hastings isn’t worrying about the lost customers, he has to be worried about the lost stock value that has gone with them.
This was the context for Hastings’ blog post of September 18, which was addressed to customers, but more likely intended to appease shareholders by explaining that the price increase was actually just preparation for the company’s masterstroke of splitting itself in two.
…streaming and DVD by mail are becoming two quite different businesses, with very different cost structures, different benefits that need to be marketed differently, and we need to let each grow and operate independently. It’s hard for me to write this after over 10 years of mailing DVDs with pride, but we think it is necessary and best: In a few weeks, we will rename our DVD by mail service to “Qwikster”.
A negative of the renaming and separation is that the Qwikster.com and Netflix.com websites will not be integrated. So if you subscribe to both services, and if you need to change your credit card or email address, you would need to do it in two places.
Remarkably, the company that realized there were enormous amounts of money to be made in removing the hassle of driving to the video store to rent a movie now thinks that its future depends on making its own service less convenient for customers. My own experience working on a large e-commerce site was that the business’ needs always press for greater data integration leading to better customer experience. This is why Customer Relationship Management (CRM) software companies flourish — they help retailers do the exact opposite of what Netflix wants to do.
Most business thinkers would look at their customers who only rent DVDs and see them as future streaming customers. Netflix seems to see them as so set in their ways so they’d rather create another company just for them. It flies in the face of what successful e-commerce companies do.
Has Reed Hastings made a terrible mistake? Or could it be he is the ultimate online commerce grandmaster? Either way, this might be a business case study that MBA students study for years to come. My money (figuratively speaking) is on this being a terrible mistake.
The reason CRM is such big business is that for a company like Netflix information about its customers is its most valuable asset. Even if Netflix and Qwikster share data, it will only be sharing. As the post makes clear, they will be run as two separate operations, requiring maintenance of two different accounts if you want the option of either renting DVDs or watching streaming video. And you’ll have to do two different searches, instead of simply doing one search and seeing if a given film is available for streaming, on DVD or both.
At this point, I’m no longer thinking Netflix is so amazing, even though, as a practical matter, there’s not much downside for me in the new plan. I tend to get one movie on DVD and then let it sit unwatched for a year. Meanwhile, my family watches at least an hour of streaming Netflix video most nights, usually more. What bothers me is that my access to easy choice has been removed. Even though I rarely used the DVDs, I now have to intentionally choose to use them or not use them in my search for entertainment. I rarely chew gum either, but that doesn’t mean the local grocery story should take it out of the impulse purchase racks by checkout, and build a separate store next door just to sell gum.
So, if I continue with Netflix, I probably won’t sign up for Qwikster (apparently it’s still 1997 in the mind of whoever thought of that name). But I’m surprised at how much I resent having the decision about not renting DVDs made for me instead of being allowed to make it myself.
What could possibly have prompted such a seemingly irrational business decision? The answer is right there in Hasting’s post:
For the past five years, my greatest fear at Netflix has been that we wouldn’t make the leap from success in DVDs to success in streaming. Most companies that are great at something – like AOL dialup or Borders bookstores – do not become great at new things people want (streaming for us) because they are afraid to hurt their initial business. Eventually these companies realize their error of not focusing enough on the new thing, and then the company fights desperately and hopelessly to recover. Companies rarely die from moving too fast, and they frequently die from moving too slowly.
Reed Hastings is scared. But he’s not scared of competing businesses. He’s scared of himself. He’s afraid that if he doesn’t separate himself from the company he built — DVD rentals by mail — he won’t be able to focus on the company he’s building — streaming video on demand. He’s afraid that in a world where fast moving companies try to take down slow moving ones, Netflix was in danger of becoming slow.
Maybe Hastings is right. Maybe he knows something the rest of us don’t and time will reveal all. But at this point the stock market is betting against his leadership and so am I. Moving fast in a clear direction is smart business. Moving fast randomly because you feel like you need to move or something bad will happen is a psychological issue that’s likely to give stockholders good reason to make some fast moves of their own.