Subtract the ineptitude, and here’s what happened: Netflix raised its fees by just $6 a month for people who wanted both the company’s baseline red-envelope DVDs-by-mail service and access to its newer, video-on-demand-style streaming library. The decision was defensible, even reasonable: Price hikes are one of the ways businesses stay in business.
The problem is that you can’t subtract the ineptitude. The announcement this summer that the two services would now carry separate fees was met by a surge of Twitter fury and a wave of customers vowing to unsubscribe (Netflix estimates only about 4 percent did). CEO Reed Hastings found himself scripting a blog apology so drenched in strained self-abasement (“We lacked respect and humility,” he wrote, like the subject of a self-criticism session in seventies China) that it resulted in more than 27,000 largely acid rejoinders. Then came the rechristening of the delivery service as Qwikster, an embarrassingly tin-eared moniker that suggested Netflix’s grand plan was to turn back time to 1998. (In fact, “-ster” as a suffix to anything? Maybe never again.) And then, last Monday, the final (we hope) kersplat: a reversal of everything but the price hike. The good news is that Netflix stock is now almost $10 a share higher than in July 2010. The bad news is that it’s $185 lower than in July 2011.
It’s been impossible not to laugh at this elephant ballet, with its attendant sideshows of “Hitler reacts” videos, SNL sketches, and newspaper pieces comparing the company’s attempt at damage control to Anthony Weiner’s and Rupert Murdoch’s—it’s a case study in how quickly a crisis of spin can become a crisis of substance. And the fallout should have entertainment service providers saying, “There but for the grace of Twitter go I.” Some conclusions:
There’s a downside to being loved.
For the last three years, Netflix finished either first or second in a national survey of customer satisfaction with e-retailers. That’s an intense level of connection. These days, our relationship with our main arteries of entertainment and information can seem increasingly personal. Netflix and Amazon, Facebook and Twitter, HBO, Apple—your list may vary, but we are what (and where) we figuratively eat, and when one of those companies changes its recipe, it can produce a New Coke rage reaction. We don’t seethe when our long-distance carrier or cable company raises its rate, because we pretty much hate it already. But we love like family those companies that give us things for free (or what can feel like free if you don’t look at your credit-card bill), and when a brand we use to compose our consumer identity takes away the sugar, it feels like a violation. We respond as people do when they are betrayed, whether it’s justified or not.
Don’t get ahead of your customer.
Obvious, right? But it’s a surprisingly common mistake. Because the companies’ employees, as well as the journalists who cover them, tend to be early adopters, it’s easy to forget that most users live outside that bubble. Netflix didn’t just announce that it was splitting its businesses—it practically declared that one of those businesses was for old people who don’t know how to use DVR and still feel weirdly attached to antiquated entities like the Postal Service. Some problems with this approach: First, as Netflix users know, many of the most popular movies still don’t stream. Second, streaming movies through your TV can be fitful and crashy. Third—and probably most important—though the industry may have decided that DVDs are the past and streaming is the future, for all but the most tech-forward consumers, it’s wrong. DVDs are the present, and streaming is the future. You may think they’re ready for history’s dustbin, but your mom doesn’t. Turns out she’s a Netflix customer too.
Beware of New Paradigm Fatigue, especially in an economic downturn.
Entertainment consumers are told with disheartening regularity that everything is about to change. Sometimes it does, because newer is actually better. But more often, customers are justifiably resistant. There’s a reason Blu-ray hasn’t taken over the DVD market, and it’s for the same reason you probably haven’t run out and purchased a 3-D TV. They’re the entertainment-tech equivalent of sous-vide cookers or food dehydrators, cool stuff you might not actually need. Consumers aren’t particularly craving an upheaval right now just because one is possible any more than they’re through with network TV just because cable exists. And in attempting to rush its customers, Netflix forgot why it’s really valued: comprehensiveness (relatively speaking), convenience, and reliability.
The pity is that, until this quagmire, Netflix was thinking intelligently about its future. With studios seeking to monetize their libraries more aggressively and competitors pushing into the streaming-video business, the market that Netflix has had to itself is clearly changing. And the company wasn’t wrong to plan for a world in which it’s no longer a one-stop shop. Last spring, Netflix made headlines by committing to exclusively distribute House of Cards, a high-profile David Fincher–Kevin Spacey drama series. Changing brand identity from “place where you can get movies” to “venue for cool original programming” is one interesting way to go, but it took HBO more than a decade to make that transition, and it didn’t announce the move with a price hike, a rebranding, or an implicit warning that soon old-school subscribers would be kicked to the curb. Netflix has considerable image-rehab work ahead, and not just with a very skeptical Wall Street. The company has already sent out e-mail mea culpas for its Summer of Flub, but it still has 24 million subscribers who need coddling. To mend fences, Netflix might start by asking its customers what they want. Because in this case, that’s probably a better plan than telling them.
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