Wednesday, September 21, 2011

Netflix - Managing in that Nasty Growth Cycle

Netflix pulled another surprise move on its loyal customer base.  After only recently hiking the price of its service by almost 60% (charging equally as much for having DVDs mailed to your home versus on-line streaming of video - when it used to be all one price), Netflix has announced that it is spinning off its DVD business.  The new company (really a division of the original) will be called Qwikster.  Netflix will retain the video streaming business while the DVD consumer will soon go to Qwikster for DVDs mailed to your home. 

There are more than a few people upset about all this.  It is reported that Netflix has lost close to 1 million users of its 22 million base.  The stock price has taken a massive hit and people are swearing to cancel their subscriptions.  The company CEO, Reed Hastings, apologized for his handling of the price increase and all the trouble he has caused by not communicating effectively and getting all his customers rather upset.  This apology, by the way is also where he announced the company split.  Netflix, of 3 months ago, seemed a way cooler entity with which to do business.  Everyone was just starting to fumble around to see if their TV had a computer hookup on the back of it, so we too, could enter the magical new world of streaming video in our home. The streaming picture is also really sharp in HD.

Growth Category Strategy

Lets take a strategic look at this move.   Netflix competes in a market that is defined as a Growth market in a classic category lifecycle model.  You remember the category lifecycle curve of Introductory, Growth, Maturity and Decline.   In a category that is in the growth section of the lifecycle, players can rely on three things to happen.  First, competitors are not only out to displace you, they are out to reinvent the category with new technology.   Second, market share leadership is a fleeting thing and you cannot get used to it even for a moment.  Lastly, if you stay still for more than a day, you are toast.  Think of brands like Tivo, Atari, and even Atkins diet. They are all gone because they did not evolve once they became market leaders and inevitably, competitors came in and made them irrelevant with newer and more exciting technology.  There are currently several viable video streaming alternatives waiting in the wings to sign you up for some type of streaming service.  For example, Google just bought Hulu – a company that streams video.  Netflix does not want to be seen as a DVD rental company; allowing competititors to position them as “old news”.
Strategically Sound Move

Strategically, the Netflix move makes sense.  There are over 100 million households in the USA, and the average home has more than 2 televisions, multiple computers, smart phones and soon tablets.  So while 22 million Netflix subscribers sounds like a lot, it isn’t anywhere near where the video streaming market will be soon.  Netflix doesn’t see itself as owning a market yet. In another year, Netflix will have moved to yet another technology wedded to the last handheld gadgets and new operating systems.

What about the Consumer?

So the question is how do you manage to reinvent your company with super speed without taking your loyal users on a roller coaster ride?  Netflix certainly didn’t get the communications right, and its consumers may penalize them more than just a little.  Netflix has cashed in a chip of consumer trust they may one day need.  While all this may be soon forgotten and dwarfed by the market potential they are positioning themselves to capture, they cashed in the “cool” chip and are now just another arrogant company out to make a buck.  Consumers don’t care about growth curves and strategy, they just want to be loved and delighted.  Does anyone know a good PR firm? 

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