NetFlix’ $8 Billion Bet. Did They Simply OD On Business Management Theory?

NetFlix Share Price Over the Last Three Months

NFLX stock price on July 11, the day before the announcement of its the new pricing scheme: $290. It reached a high of $298 on the day after.

It was all the way down to $208 just 4 days ago when word came out about the impact the price changes have had on subscriber growth. And at the close of the market on September 19^th after announcing the re-naming of it’s DVD service to Qwikster: $143, a Market Cap of $7.55B.

The pricing changes and related mess has basically shaved around $7 or $8 BILLION off its market value.

Ouch

As a customer, I am just confused. And judging from the comments from my network, so are my peers. But as a marketer, I am just blown away at how poorly this has been handled. Particularly when you consider just how well NetFlix usually handles themselves.

So what happened? I have no insider knowledge whatsoever, but here is what I am HOPING happened: Panic.

Here is my completely hypothetical sequence of events.

1. Several years ago, maybe even at launch, NetFlix came to the conclusion that streaming would be their only business. They were happy to have the returns and cache that the DVD business gave them. And hey, putting Blockbuster out of business was a nice plus, but streaming was always the way forward.
2. Streaming took off much faster than they ever thought possible, even though they generally had crappy movies that nobody wanted to watch. BluRay, Wii, web enabled TVs, higher bandwidth in the home, whatever the reason, streaming ramped rapidly.
3. Somewhere along the way key people in the company read Innovators Dilemma, Good to Great, Only the Paranoid Survive, How the Mighty Fall, and all the other excellent business books about how to avoid going out of business… Problem was, they read them all in one weekend.
4. Having disrupted an industry, the senior leadership became paranoid about when it would happen to them. Fretting that if they waited too long they would never be able to make the leap credibly, they started to plan for the day they would exit the DVD business.
5. Somebody did an advanced pricing analysis of the price people would be willing to pay, taken against the projected costs of each business, and decided they had to start making pricing changes now if they ever hoped to scale the streaming businesses.
6. The bean counters went off and did what they do, handed it to marketing and communications, and the new pricing was announced on July 12 in what had to be the first step in a well planned, and potentially years long transition.
7. And then ALL HELL BROKE LOOSE.
8. And then everybody panicked
9. You can argue what happened next, but to me it’s clear. After losing pretty much half the company’s value the team decided they didn’t have whatever time they thought they had to announce the split of the company into two units.  This led them to throw the strategic plan and operating time frame they had concocted out the window and rush out the half-assed announcement today. Maybe for no other reason than to explain the moves to Wall Street as their subscriber growth stalled.

And they got crushed for it.

There really is no other logical explanation. They had to be rushing. To start with, Qwikster is a horrific name. But if they weren’t rushing and had settled on that name, they would absolutely have pre-bought the Twitter handle. Now that the news is out, the self-described pot head who owns the handle just funded his buzz for the next millennium. In this day and age, NOBODY launches ANYTHING without owning the key social properties. You certainly don’t let the cat out of the bag BEFORE you secure the rights.

Other evidence they were scrambling?  The letter to customers from CEO Reed Hastings was sent out in the middle of the night on a Sunday. Its opening line? “I Messed up. I owe you an explanation.” From there the letter proceeds to ramble about what they were aiming to do with the price changes. The first problem is that this letter sets up the expectation of an apology for poorly handling the pricing and a roll-back to the old way of doing it. Once you realized that wasn’t what this was about, it was pretty hard to figure out what he meant instead. I am STILL not sure.  If the marketing team thought that was the best way to roll this out, they weren’t paying attention in marketing school!

So where does NetFlix go from here? Press accounts today suggest that they are standing by their decision. At this point, that is probably the only option, though there are other examples of unpopular decisions getting rolled back (Remember Facebook Beacon?) One wonders however after all the noise subsides (and there is A LOT of noise right now) if history will judge them as having taken a half step back to take 4 giant leaps forward?

Right now it’s an $8 Billion bet, and counting. They had better be right.