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Top 10 Film Industry Stories of 2011: #2

Netflix Falters

By Kim Hollis

December 30, 2011

Goodbye, New Coke.

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Almost overnight, Netflix was inundated with incendiary criticism. Simultaneously, a lot of customers said, “Price increase? I’m out.” After two straight years of quarterly growth, Netflix’s third quarter included 800,000 lost subscribers. The company immediately cut all short as well as long range projections as they came to grips with the fact that the entirety of their decision making had been called into question. Tying off the physical media division of the company was not something that had to be done immediately. Similarly, the price increase was so dramatic that even in hindsight it is impossible to understand why they felt customers would be okay with it. Netflix’s humorous defense of their decision was the following:

“Everything Netflix does is with extensive research and testing and analysis, so we expected some people to be disappointed.” -- company spokesman Steve Swasey

Business classes will be created that meticulously examine exactly what testing, analysis and other “extensive research” Netflix had done that caused them to come to the decision that people would be happy to pay 60% more for the service. I struggle to think of a single instance wherein someone would go, “Oh, it’s fine that you are charging me this much more for the same thing I bought here last month.” And the total elimination of existing plans is equally headscratching. Effectively, Netflix spit at their customers in three different ways with a singular announcement. It boggles the mind.

Perhaps we should not be so surprised by this turn of events. After all, Netflix was a startup company that had experienced unprecedented growth. That in no way changes the fact that it was being run by a man who was a self-described failure in his previous attempt as CEO of a company. Reed Hastings is a fascinating man as well as a mathematical savant. He may not, however, have a mind for business inasmuch as he has a mind for Big Ideas. In a lot of ways, that is much better for us as a people that someone with his intellect is more focused on implementing new creations than he is about squeezing money out of subscribers. The problem is that the people he has hired to be the chief decision makers at Netflix are clearly incompetent. There continues to be a vast divide between the social media generation and the people running new tech businesses as if they were any old widget. Hastings may be another Steve Jobs as an inventor but he is clearly not a Steve Jobs as a businessman and none of the people he has hired to handle these concerns has proven themselves capable in 2011.




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The proof is in the stock numbers. On July 13, 2011, Netflix stock peaked at $298.73. To put this number in perspective, consider that Apple stock closed at $358.02 on the same today. As of close of business on December 30, 2011, Apple currently sits at $405. Netflix has fallen to an almost incomprehensible $69.29. This is a loss in stock valuation of $229.44 as well as a decline of 77% in less than six months. Companies that fall this far this fast rarely right themselves.

Netflix now stands on the cusp of total chaos. The company could yet redeem itself as it continues to have a novel, enjoyable product with Netflix Watch Instantly. The potentially fatal dilemma they face is that the expense of retaining the rights to all of their digital content will escalate quickly. They have already lost the rights to Starz Media licensing, the property they leveraged to debut Starz Play and thereby expand their streaming content into the collective consciousness. They face similarly difficult negotiations as they attempt to renew contracts with the various content creators. Expectations are that a company with capital of less than $100 million may need to broker deals in excess of $2 billion simply to maintain their current status. If true, this would be mean further massive subscription plan rate increases. Imagine how that well that will go over with current Netflix members.

After an 18 month period where Netflix could do no wrong, a single July announcement may have irreparably damaged the brand. Seriously, Qwikster? LOL. WTF?


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