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    Strategic Change, Execution Blunder (Part 3) – Netflix’ Troubles

    By Claus Schafhalter | October 3, 2011


    Netflix, the movie rental service, has been a consumer favorite and Wall Street darling for a long time. Netflix changed the way Americans consume movies and Netflix drove competitors out of the market with their simple and valuable business model. Customers manage a queue of movies and TV episodes on their website, and Netflix ships out DVDs to the customer’s home complete with a prepaid envelope to send the disk back. They also introduced a streaming service where customers can watch movies and TV series on consumer devices using connected TVs, set top boxes, computers, tablets or smart phones.

    All for a flat fee without concerns to incur nasty late fees.

    As more and more customers signed up, Netflix’ share price rose to a high of almost $300 in July 2011 valuing the company at $15.8 Billion. Who could stop Netflix’ run?

    Apparently inside Netflix’ corporate walls a new strategy evolved. Management identified that the DVD rental business will be replaced by streaming content via the Internet, and Netflix needs to concentrate on streaming services to ensure to stay in the lead. Netflix’ DVDs-by-mail service seem to be a destruction and might even hinder the growth of the streaming library because most content provides price their offerings depending on the number of subscribers. There are certainly other considerations for management and board to pursuit this strategy, for the purpose of this post it is sufficient to know that Netflix came up with this new strategy and started to execute on it.


    Miserable execution of a sound strategy?

    In July 2011 Netflix made a – for the public – surprising announcement:

    They will price their service offerings for mail service (DVDs) and streaming service separately and – in the process – hike the price for their services by up to 60% if the customer wants to keep both. Very little information was given why they do that, in a press release they even tried to sell this as a potential price reduction. Netflix’ Chief Service and Operations Officer released: “By better reflecting the underlying costs and offering our lowest prices ever for unlimited DVD, we hope to provide a great value to our current and future DVD-by-mail members” .

    What Netflix did not expect was the firestorm of negative reactions fueled by social media and entries on Netflix’ blog. The discussion was mainly about the 60% price hike for the combined DVD / streaming offering, in a time when the U.S. struggles with an anemic economy and stagnating incomes. Shareholders did not like the announcement either and share prices started to decline. Later Netflix warned that subscriber growth started to be lower than anticipated and became even negative. And share price accelerated its downturn.

    Later Netflix’ CEO released a letter to customers somewhat “apologizing” for how they managed the information flow about the plan changes. He also introduced that Netflix will split off the DVD by mail service entirely into the new “Qikster” service, thus leaving Netflix with streaming only. Again the reaction by customers and shareholders was very negative, and Netflix shares plummeted. All said and done Netflix shares moved from $300 in July to less than $110 end of September 2011, destroying more than $9 Billion in shareholder value.


    Sound Stragey?

    Hard to say. Definitely it does not make much sense to send digital information stored on a physical DVD by mail. Electronic delivery via the Internet seems to be the way of the future. However, Netflix has at least 2 problems:

    1. Timing / Data Caps: Many consumers might not be ready to solely rely on their Internet connections for entertainment purposes, and increased usage of the Internet for multimedia content delivery is running into Data caps increasingly enforced by ISPs. There are very few products available that still allow unlimited data on wireless phone networks. Also, providers using cable or DSL have data caps. A lot of content streamed from Netflix’ servers bring customers close to approach these limits. It seems premature to bet the house on streaming only when a the delivery channel (Internet) is out of Netflix’ control and – worse – very often run by direct competitors like AT&T (uVerse) or Comcast with their content offerings.
    2. Content: Netflix streaming content in general provides TV episodes and older B movies. Latest movies are usually not available via streaming. These movies are usually released on DVDs, which means for a lot of customers that streaming alone does not cover all the content they wanna watch.


    Execution Blunder?

    Certainly. The public outcry fueled by social media, subscriber cancellation, and collapse of share price are evidence that the execution of strategic change was mismanaged. What the most egregious blunders are, why I think they were made, and what management could have done differently will be subject of a later post in this series. But before I go there, I want to look at HP’s suicidal moves that lead to the firing of their CEO a few weeks ago.

    Claus Schafhalter, Management Consultant @ Sunogos


    Find the other installments of this series:

    Strategic Change, Execution Blunder:

    (1) Part 1 – Introduction
    (2) Part 2 – What Happened At Nokia

    (3) Part 3 – Netflix’ Troubles

    (4) Part 4 – Netflix Commits A U-Turn

    (5) Part 5 – Does HP Know What It Wants To Be?



    Topics: Change Management, Strategic Change, Strategic Execution | Comments Off on Strategic Change, Execution Blunder (Part 3) – Netflix’ Troubles

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