I first met Netflix co-founder Reed Hastings in 2001 at a Maxtor event where I was the dinner speaker. He explained then that the company had always intended to deliver movies over the Internet (hence the name Netflix) but was starting with DVDs because the network infrastructure simply wasn’t ready for digital delivery. They’d eventually drop the DVD deliveries, though I think his estimate of when that would happen was around 2007, not 2011 as the company announced this week. That wasn’t his only underestimation, of course. Hastings also underestimated consumer and Wall Street reaction to the boneheaded way Netflix handled a recent pricing change.
Day traders have to love this, but unless you have your retirement tied-up in Netflix stock and were hoping to stop working this week it doesn’t actually matter much. Still, there’s some value in looking at how Netflix handled the recent changes and how they might have handled them better.
Am I the only person who didn’t see the recent Netflix price change as a price change at all? We have a streaming-only subscription so nothing changed for us. As a family with young children, Netflix DVDs would disappear and we’d end up having to pay for them, so it wasn’t a functional service. We mainly use DVDs while traveling in any case, having finally learned that you can return Red Box videos to any kiosk. No cinephiles here unless you count a morbid fascination with Shark Boy and Lava Girl.
Rather than increase the cost for those who want to stream and continue with DVDs, Netflix probably should have announced the Quikster DVD service, offered current users a choice to stay with streaming-only Netflix or move to DVD-only Quikster, then thrown-in a streaming option strictly for Quikster. This would have been clearer and cleaner messaging but you can see how Netflix might have seen that path as being even riskier than simply adding a surcharge for DVDs on the way to an eventual spin-off.
Wall Street is keyed to total subscriber numbers and anything that causes those to stop growing would hurt Netflix shares. So for Hastings the real question was which move would hurt the company and its subscribers less?
Some level of pain was inevitable, because subscribers don’t like change (unless it involves lower prices) and day traders love market uncertainty exacerbated by throngs of angry torch-wielding peasants upset about...DVDs?
Reed Hastings took his best shot and maybe it was the wrong one. To compensate he threw himself under the bus in a blog post which also means nothing. Netflix is continuing to follow a path laid out more than a decade ago. And three months from now none of this will even matter, the peasants and their torches having moved on to the next source of upset.