Netflix, one of the most beloved online tech companies in recent years, is now singing the tunes of a Motown classic by The Supremes: “Love Child”.
How does a company go from being adored to scorned seemingly overnight? With one fellow swoop of a price hike, that’s how. Who’s to blame for this fiasco? Well, Netflix’s CEO Reed Hastings, will tell you himself- if you must know- he is.
Wait a minute?! Aren’t CEO’s supposed to say something along the lines of, “Economic uncertainties led to unforeseen drastic measures,” or “Due to national consumer protection and tax regulations,” or even perhaps, “My dog ate all the company’s projections… for the past five years;” anything, other than personal fault when something goes array?
Hastings, hastily (pun intended) announced the increase to the DVD-streaming movie subscription plan for its members by as much as 60%-and as Brad Tuttle of Time Magazine pointed out- somehow believing that, quote:
We think $7.99 is a terrific value for our unlimited streaming plan and $7.99 a terrific
value for our unlimited DVD plan. We hope one, or both, of these plans makes sense
for our members and their entertainment needs.
What’s the big deal you ask? Under the old plan, customers had the option of choosing to receive movies for $9.99 through the DVD mail-in service or by streaming online through either the computer, television, or other devices (or by what I use to call, “Honey, turn on the Playstation thingy”). Under the new plan, to have both services, one would have to pay $15.98 a month.
The announcement of the change in Netflix’s operation sent customers raging with immediate hate blasts posted on the company’s blog and Facebook page, and if customers weren’t stunned enough, they were also hit with news of the company splitting into two. Now, Hastings is spending his days doing major PR, from making apologetic company videos to appearing on ABC’s NightLine.
The new Netflix, Inc. umbrella will house its online-streaming business while the DVD-exclusive portion will be named, Qwikster. Many speculate that Hastings will eventually sell its streaming division to the likes of companies such as Amazon or Google, but I say the latter is more likely instead.
The split comes as a surprise to most but Hastings has always talked of online-streaming as being the wave of the future.
Netflix has contracted a host of licensing deals since 3Q 2010, with agreements from media companies Relativity Media LLC and EPIX, and the Disney-ABC Television Group, allowing Netflix to stream hundreds of episodes from the ABC Television Network, Disney Channel and ABC Family. More build-up of licensing agreements continued with NBC Universal Domestic Television Distribution, Miramax, CBS Corporation, which introduced Netflix to the international arena in 2010 with markets in Canada, and with Grupo Televisa SAB (Televisa)- expanding their reach to the Caribbean, Latin American and Brazilian markets as well, all information gathered by Reuters.
Netflix will continue to make long-term strides despite the temporary backlash from customers and investors.
After the price/separation notice, a new and exclusive video- streaming deal with Dream Works Animation was revealed. CNN Money reporter, Julianne Pepitone, reported that the deal gives Netflix a multi-year agreement allowing the sole streaming rights to some of Dream Works’ movie and TV specials, but the distribution doesn’t take effect until 2013. This announcement comes on the heels of miss-called steps taking by Netflix, including a previous membership price increase (this is actually the second time prices have gone up) resulting in a projected loss of one million subscribers. However, Pepitone points out that, “It’s a spot of good news for Netflix, which has had a rough year and has been working to ramp up its streaming catalog. The company lost its important Starz/Sony contract earlier this month. And customers — who are already angry about a Netflix price hike — have been complaining about a dearth of streaming options.”
A major setback arose when the company’s stock price took a dive from $210.05 to $155.19 by the closing weeks’ end; a 26% drop as news about the changes began to pour out. Before then, Netflix (NFLX) was fortunate enough to only experience gains when the stock price reached the $100 mark in May 2010 and later hitting a high of $304.79 in July 2011, data courtesy of Google Finance. Added to this, last quarter’s (June 2011) return on equity for the company was a commanding 89.74%, compared to the annualized total return for the S&P 500 of 18.5%, as of August 31, 2001 (Standard & Poor’s).
“I messed up. I owe everyone an explanation,” Reed Hastings declared on the company’s blog. He also went on to declare, “In hindsight, I slid into arrogance based upon past success. We have done very well for a long time by steadily improving our service, without doing much CEO communication.”
It takes humility to admit when you’re wrong, and for that, Hastings should be applauded. Although some will snicker at this notion, but ask yourself: “How many CEOs would have done the same?” and how many times have we all heard CEOs cried wolf when caught “red-handed”?
Netflix will rebound. They have strong projections in value, growth and sustainability, along with needed improvements to its operating systems. Furthermore, as Netflix introduced its newly implemented changes to various policies, one very important policy was evident: the one about honesty being the best policy.
- Netflix Gains DreamWorks Animation But Faces Stiffer Competition In Brazil (paidcontent.org)
- Ernan Roman: Netflix: What Worked and What Isn’t Working (huffingtonpost.com)
- Netflix co-founder: Qwikster is a smart, brave move (news.cnet.com)
- Silicon Alley Insider: How Netflix Walked Away from 95% Of Its Revenue — And Why It Worked (NFLX) (businessinsider.com)
- Updated: Comparing Streaming Video Services: Blockbuster, Netflix, Hulu, Amazon (paidcontent.org)