Netflix is down but not out

Reed Hastings, CEO of Netflix, is willing to take a risk and try new things, says Robbie Kellman Baxter.

Story highlights

  • Since July, Netflix has been taking a beating, says Robbie Kellman Baxter
  • It raised prices by 60% and made, and then unmade, a drastic change, she says
  • Baxter: But Netflix's CEO, Reed Hastings, is willing to make mistakes and take risks
  • "Netflix is still a 'buy' in my book," because it's moving forward, says Baxter

On Monday, Reed Hastings, CEO of Netflix, posted on Netflix's blog that the popular online movie rental service would not be breaking off its DVD-by-mail business from its online streaming business. This was Netflix's third major announcement relating to changes in pricing and service offering in four months.

Like BlackBerry and Bank of America, both of which have recently borne the wrath of disappointed customers, Netflix has been subject to tremendous criticism over the past few months. (Full disclosure: I consulted for Netflix for about two years between 2003 and 2005.)

While Netflix is taking a beating, with rapidly declining market valuation, angry customers and negative media coverage, Hastings' announcement actually signals the company's willingness to keep tinkering until it gets the service right. He is that rare public company CEO who is willing to take a risk, make mistakes in public and keep trying new things. For that, he deserves some credit.

Netflix raised its prices in response to the expected increase in content pricing from major studios, which the company believed made Netflix's flagship offering, one-DVD-out-at-a-time-plus-unlimited-streamed-content for $9.99, impossible for them to continue. As a result, in July, it announced plans to split the DVD business and the streaming business, charging $7.99 for each. Netflix's goal was to convert current clients from "DVDs and streaming" to "DVDs or streaming" and charging a premium for customers wanting to stay with both.

The announcement was seen as an attempt to raise the price by 60% without offering additional value, and customer response was fast and negative. Since then, Netflix has been attacked from all sides for poor communication, poor product strategy and poor pricing decisions. Indeed, its communication has been poor: first with the July announcement, because it was misleading, and then with the September and October announcements, because they focused on responding to the wrong problem, thinking customers were angry because they didn't know which of the two new options to choose. In fact, customers were angry because they were being forced to choose or to pay more.

Robbie Kellman Baxter

Hastings knows that he needs to transition his subscribers from old media (DVDs) to new (streaming) and has been methodically preparing for this transition for several years. The problem came in the timing and the messaging of the transition, not in the transition itself.

Too many businesses have failed because they failed to focus on the benefits they provided their customers instead of the technology they used. Companies committed to trains word processors, and typewriters were forced to consolidate or go bankrupt as their technologies became obsolete and they failed to adapt. In their place, consumers spend their money on cars, PCs and tablets. Netflix tried to make that transition, and the process has been painful but may yet be successful.

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    In subscription-based businesses, it is nearly impossible to raise the price for a service without dramatically improving the offering. Since the initial July announcement, Netflix has inked favorable streaming deals with several major studios, including Dreamworks, Epix (Lionsgate, MGM and Paramount), Animal Planet and the Discovery Channel -- a fact Hastings referred to in his most recent blog post. Had Netflix been able to time the price increase with the announcement of significant new streaming content, consumers might have accepted the change.

    Netflix took a big risk with its new business model and pricing structure. Hastings had a vision of where he wanted his company to go and made some mistakes trying to achieve that vision. Some of those mistakes look like they may have been avoidable, especially in hindsight.

    Despite my personal annoyance at the price hike and the inconsistent messages, I continue to respect Netflix and its brave CEO for their (multiple) public apologies, their speed in developing a new service (Qwikster) and their speed in canceling Qwikster when they saw the negative response. Hastings "failed fast" and then adjusted and adjusted again, which can be painful. His willingness to move forward, even in the face of public criticism, is all too rare among public company CEOs.

    Netflix is still a "buy" in my book. It knows how to deliver video content through multiple channels. It seems to be making headway in its studio deals, and it is willing to act fast, admit mistakes and keep moving forward.