Netflix: The price is the point
October 12, 2011
It is easy (I find it particularly easy) to criticise businesses that seem to spend endless energy, time and money on consumer research and focus groups. As with bringing in consultants, it often seems mostly a way for management to avoid making the decisions it’s paid to make or, at the very least, to establish some plausible deniability should a decision be wrong; “it’s what the consultants / research (delete as appropriate) told us to do….”
So you might expect me to applaud when a CEO appears to make big, weather-changing decisions about his business based entirely on the intrinsic strategic imperatives of that business. Well, up to a point. When it seems no one even thought, “I wonder what customers will make of this – what would I think if I was a customer?” And no one even said, “you know, Reed, maybe we should sleep on this?”
Yes, I’m thinking of Reed Hastings and Netflix and its recent debacle over ramping prices and then splitting the business between streaming and mailing DVDs. Some have called it the biggest corporate cock-up since ‘new Coke.’
Few companies were flying higher than Netflix before the announcement – it was lauded as a visionary business that had established itself at the forefront of the shift to OTT online media, it was gaining subs hand over fist and was oft quoted as a major threat to traditional pay-TV operators as they cut the cord to go Netflix.
So, Netflix had a major opportunity it wanted to exploit by separating the super sexy valuation of its online business from the boring, old school (but still massively popular and profitable) DVD by snail mail business.
It also had a major problem; it was a victim of its own success as far as its content suppliers were concerned. As it moved from a useful way to squeeze the last drops from the DVD window, to become a potential squeezer of the revenue available to content producers from the premium pay-TV and VoD business, they began to demand higher prices from Netflix if they were to go on supplying its online service.
This, in turn, would undermine Netflix’ major growth engine – its remarkable cheapness, particularly in the context of a combined online and offline deal. The answer, it appeared, was to a. Hike the prices and b. Split the business in name and operationally.
On a. the prices were raised effectively 60 per cent for subs to both on and off line. On b. the off line was bizarrely renamed Qwikster and customers found they had to deal with completely separate web sites for orders, content searches and everything else. Subs have taken a hit from the price rise and there was an outpouring of complaint about the splitting of accounts.
So Hastings bit the bullet and admitted the whole thing was a complete mess, and with many mea culpas the service split was abandoned, along with the Qwikster name.
Some cynics have, over the years, suggested the debacle of ‘new Coke’ was all a cunning plan to provide worldwide publicity and allow a reinvigoration of the ‘old’ or ‘classic’ Coke. There’s no way, of course, the whole Qwikster nonsense was to provide cover for the huge price hike – which stays firmly in place. That was the imperative, as Netflix success online cannot thrive on the old model of cheap content access. The content suppliers don’t need the distribution that badly (there’s plenty of alternatives) and from now on will dictate their price far more than Netflix would like.
Other posts by Nick Snow: