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Where Netflix went wrong
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The good folks at Netflix recently announced a huge price hike for their customers, as they separate their DVD and streaming businesses into distinct product offerings. If you look at the comments on the blog post where they made the announcement, you will see that the vast majority of comments fall into two categories:
-- This no longer provides value for me, and I might leave...
-- I hate you Netflix and I'm leaving (or have left) !!!
Netflix made a huge mistake -- not because they raised their prices, but because they tried to spin the price increase as a benefit to customers. It is, in fact, going to cause an increase for most customers.
The biggest problem is that they have a potentially useful story to tell about the price increase. If you look at their ongoing battle with the movie studios, you will see a similar battle to what played out between Apple and the music studios over the past decade. In fact, this is just another chapter of Media Companies vs their Customers, which started back in the late 90s.
Netflix is engaged in a war with the movie studios who want to get top dollar for their content, and feel that there are enough competitors that they don't have to be steamrolled by Netflix in subsequent negotiations. (Additionally, I'm pretty sure they didn't anticipate the demand that Netflix was able to generate). As a result, Netflix is looking at up to 10x increases for licensing the content.
Rather than using this information to subtly engender support for themselves with their customer base, Netflix instead chose to craft their message in such a way that their customers only noticed a huge price increase (up to 60% more), for no added value. This has been a big part of the massive backlash they have experienced, and it is occuring on their own website, for the most part.
Needless to say, this decreases their leverage even more...
And it is so easy to see from the comments that most of their customers are blissfully unaware of the complete story behind the costs... While there are many up and coming competitors, they all have their drawbacks and weaknesses, and many do not have sufficient infrastructure to manage a major influx of new customers or compete with Netflix at a high level. Not today, anyway.
Also, they may not be able to secure sufficiently inexpensive deals for new content in a way that allows them to keep prices much lower than Netflix. That's the good news for Netflix.
The bad news, is that many who leave might decide to forgo any other legitimate distribution avenue and simply torrent everything that they care about. That would be bad for ALL the players, as the music companies can well attest.
What Netflix needs to do is get a handle on this story. AND they need to give people some sort of useful discount if they purchase both packages. Shaving just $2 or $3 dollars off the combined bundle would go a long way to assuage concerns of price gouging that many of their customers have right now.
It's a really dumb strategy to be fighting your customers and suppliers at the same time. All this proves is that corporate messaging is very important, customers are not stupid (even if they don't have all the information they need), and in the social-media-instant-communication-age, it is silly to get people all riled up when you don't absolutely have to...
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13 Comments
While I'll agree that Netflix' communication of these changes to their customers left a lot to be desired, it's hard to fault them. As you mention there is much out of their control, including a 10X increase(!) in content costs:
"Wedbush Securities analyst Michael Pachter said that he predicts that Netflix’s streaming content licensing costs will rise from $180 million in 2010 to close to $2 billion in 2012."
The studios are screwing themselves. Netflix is just the middleman.
It makes complete sense to unbundle their DVD-by-mail and streaming businesses. It could have been handled more gracefully perhaps, but they had to do it.
Mr. Fred Clay,
Please do not insult my intelligence or that of anyone on this blog. I am an avid reader but I enjoy watching a few shows before bed to relax.
Interesting Andrew - my wife and I read about the price increase just last night. We are new to Netflix (about 3 months) and find it to be a good service for us and we've really enjoyed the content (although the movie selection is not great, the TV selection is) and I gotta tell ya, should they raise it the 59%, we'll simply cancel it. We're not huge TV watchers - who has the time today? But we'll pay $10.00 a month to have it available; but we won't pay more then that now that we've been paying that since we won't be getting anything more then we've already been getting. I did not know the background and that the RIA et.al. had their ever-reaching hand in there to stir things up. Never seems to be enough money for some folks......
I agree that Netflix has totally blown this one, and unfortunately the only way for those of us who are customers to truly show them that they've totally blown it is to cancel our service - or at least a portion of it at a minimum.
Personally, I don't feel that Netflix does enough with the wealth of data they have to provide solutions (plans) that fit the needs of their customers. Instead they seem to be only looking at what will maximize their margins and their interests.
The limited streaming selection will likely cause me to ditch the streaming portion of my current $9.95 package - or possibly both parts - actually resulting in DECREASED revenue for Netflix and behavior opposite of what they are expecting.
Netflix is also going to cause people to reconsider their options and will open the doors for existing or future competitors to enter the market.
Who will disrupt Netflix?
@innovate
It does make sense for Netflix to separate the two businesses, but sending customers a generic email telling them their prices will go up effective September 1st (I got mine yesterday) was a very poor way to handle it. As a long-time customer, I have really grown to like Netflix's massive movie collection. However, I wasn't happy when they announced a year ago that they will have major titles after 30 days. Now this price hike doesn't sit well with me either.
We stream movies from our Wii system (ha, we use it more for movies than games) and the kids really love it. I also get DVDs, but since I never have time to watch them and they sit around our house for weeks, I'm going to cancel that portion of my program and just continue with the streaming for $8.99/mo. As for TV, I rarely watch it. If I want to see a TV show, I can stream it from Netflix at my convenience. At the end of the day it wasn't so much about the price hike with Netflix but more of the sudden inconvenience to customers. Companies do this all the time - shock their customers with surprising announcements that leave them wondering what to do. Luckily, consumers are so much smarter these days and figure it out on their own.
I agree with Anna Barcelos. We tend to use the streaming content much more than the DVDs. I cannot afford the price increase while still paying for cable. Therefore, I am likely to downgrade my membership to streaming only.
I agree also with Andrew. If Netflix had come to its customers and said, we are looking at additional costs from the movie studios therefore we will be chaning our price structure, we would have felt less hurt by the overall event.
I have been a long time Netflix customer and evangelist but I am also one of the very angry posters about this increase. Your points are very accurate-but I also do understand the market and what's going on regarding the content, Starz negotiations, etc.
That said, I absolutely abhor bad management-and they totally blew it. Bad communication, blame and the arrogance to really just say we should take it was the last straw for me.
Done correctly, Netflix could have a lot of people angry with the studios but now they will-and should-take the heat. Customers make a company-and they can break it-and getting too cocky isn't always the best thing.
We already have a ROKU set, are Amazon prime and HBO/DirectTv subscribers so we have a lot of options-and there are more. However I will miss the foreign and older movies via Netflix, since they have ton of content.
But I almost feel sad that they were able to turn me from a long time, loyal and evangelical subscriber to exactly the opposite. Perception is everything Netflix-and you really blew it.
I think we all may be misinterpreting what has happened.
First off, excellent write up...there is so much truth in your statement regarding the futility of fighting customers and suppliers at the same time.
I disagree, however, that Netflix has gone ‘wrong’...I believe that we may be missing the subtle point Netflix is making. Here’s my take: Netflix isn’t raising prices, it’s ‘gracefully’ breaking up with some of its [unprofitable] customers.
The communication of this price increase was so poorly executed (c’mon a totally sterile email without any real explanation/justification), leads me to believe that this is a purposeful act of guided consumer attrition. I disagree with Dan/Braden’s comment that this was simply ‘bad management’ and ‘blew it’...I may be missing the obvious but I believe the Netflix team is too talented to simply overlook the delivery of a such a critical communication. It was cold and calculated.
Agreeing with Chris’ comments on the realities of Netflix’s expotential costs, I think that the price increase still does not make all customers profitable (but the increase was all that could be reasonably applied at this point) and the company is okay with losing subscribers.
I wrote about this in a little more detail in this post:
http://chewitt.posterous.com/netflix-price-increases-angers-customers
Their streaming content side of their business is growing exponentially and provides an extreme value at $7.99 a month. They combed this into their mail service (their bread-n-butter at the time) while it was emerging but it has quickly became the dominate service. With media supported devices still growing (including most contemporary TV sets), the mailbox stuff is quickly taking a backseat.
For me, cancelling the mail-in DVD's was no big deal. If I can continue to pay less than $10 a month for the vast streaming content they provide I see their service as a total WIN.
I see your points, Chris but if it was cold and calculated, I think that's worse. Would you really take a chance like that in the world of Facebook and Twitter?
Great post, Andrew, and an interesting take, Chris! NetFlix is not available in the UK (and it is interesting that there are very few streaming services - I think there is only one streaming service for music).
I really don't get why the studios are so anti- LEGITIMATE electronic distribution?? It is as if customers are a begrudged necessity in their business plan! I really think sometimes that they'd prefer it if we paid to watch a movie but never actually saw it. I find their attitude really quite bizarre.
Good read. You make some really good points and I was humored by your use of Netflix's survey sentence style when you stated how user responses fell into 2 main categories...
...But, I'm sure the folks at Netflix weighed the scales before implementing the change: How do we save our business for the long-term while minimizing the negative impact of the price hike on our customers at the same time?
I've been with Netflix for a little over 2 years and a few months before they brought the axe down, I changed to the non-dvd plan since we never use our dvd player and use our laptops and wii to view Netflix content. Thus, the price hike doesn't really bother me.
Dump Netflix. Read books. You might learn something!
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