Netflix's latest show: When creative destruction attacks

Netflix's latest show: When creative destruction attacks

Summary: Creative destruction looks great on the white board. Netflix CEO Reed Hastings dropped the creative and was left with destruction---lots of it.

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Netflix CEO Reed Hastings had it all figured out. He wasn't going to be caught up in the innovator's dilemma and planned to navigate the transition from DVDs to streaming better than anyone. The creative destruction just looked great on the white board.

Unfortunately, Hastings dropped the creative and was left with destruction---lots of it. Netflix has lost subscribers, market capitalization and its reputation for a series of botched moves.

Now all Hastings can do is apologize repeatedly. In Netflix's third quarter investor letter, the company said "we've hurt our hard-earned reputation and stalled our domestic growth." "Amazing service" would bring people back. In the meantime, Netflix's bottom line will see some red in 2012 as it expands internationally.

On the surface, Hastings' plan sounded almost reasonable. Hastings was going to bet the ranch on his streaming service and raise prices to boot. After all, Netflix was worth the money right? Who can argue with $7.99 for streaming and $7.99 for DVD service. The DVD-by-mail service would be segmented---even quarantined---and Netflix would ultimately be rewarded for being a streaming entertainment company. The plan: To manage the transition from DVDs to streaming gracefully and profitably.

The math could work too. Hastings would destroy a low margin business in DVDs and grow a high-margin global streaming service.

Netflix's timeline resembles a horror movie script.

I messed up. I owe everyone an explanation.

It is clear from the feedback over the past two months that many members felt we lacked respect and humility in the way we announced the separation of DVD and streaming, and the price changes. That was certainly not our intent, and I offer my sincere apology.

The fix: Launch Qwikster. Customers called it Qwikstupid. Customers were right.

  • On Oct. 10, Hastings said in a blog post: "It is clear that for many of our members two websites would make things more difficult, so we are going to keep Netflix as one place to go for streaming and DVDs."
  • Fast forward to Oct. 24 and Netflix is cutting its fourth quarter outlook and indicates things will get worse before improvement. Netflix lost more than 800,000 domestic subscribers in the third quarter. Netflix delivered a domestic churn rate of 6.3 percent in the third quarter, up from 4.2 percent in the second quarter. Historically, Netflix churn has been between 3.8 percent and 4.5 percent.

The rub: The fourth quarter is when Netflix thought customers would be over the price changes.

Cheers to Hastings for attempting creative destruction. Jeers for botching the execution. Creative destruction has been a theme in recent weeks. Gartner analysts implored technology executives to blow up their infrastructure and start over. If it were that easy we'd all deploy creative destruction.

As Hastings is quickly learning creative destruction has a dark side and things get ugly once you drop the "creative" part of the equation.

Topics: Security, Hardware, Mobility

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  • 1st Principle

    I've been trying for a while now to persuade ZDNET bloggers and readers of one key principle:<br><br>1. Corporations WILL NOT PASS ON COST BENEFITS from technology advances to customers.<br><br>Netflix has learnt the hard way ... because customers had a choice.<br><br>We have a choice too with the move to the cloud. If computing doesn't start getting significantly cheaper then the vendor has simply retained the cost benefits for himself.<br><br>But everyone appears to be rushing towards expensive public clouds from the usual suspects: just one example from private operations too - the outrage at VMWARE's pricing changes.<br><br>Unless there is a concerted effort to combat the major corporations ... they WILL NOT PASS ON COST BENEFITS ... and you will be locked in to their cloud as well as paying 30% tax on client application downloads.

    MORE DESTRUCTION I say: the Internet should naturally destroy or marginalise certain industries.
    jacksonjohn
    • RE: Netflix's latest show: When creative destruction attacks

      @johnfenjackson@... That is not true. As long as people are willing to pay more a company will raise it prices. When people have another cheaper option they will jump ship. Amazon, Wal-Mart, even Netflix when it started all gave the same products at a cheaper price then the competition and ran many others out of business because of it.
      Every company is trying to expand, raise capital, and be competitive at the same time. The customer votes with their pocket book, and even large corporations listen to that.
      Sevrinus@...
      • RE: Netflix's latest show: When creative destruction attacks

        @Sevrinus@...
        I'm still trying to figure out why there is so much negative press about Netflix. We stopped renting DVD's from them over a year ago...and kept one Netflix DVD on the shelf indefinetly until they made these price changes. We were then prompted to cancel the DVD side of things, since we never use it, and to promptly send back the Netflix DVD we have been holding hostage ever since we started streaming content on our living room entertainment center (and now on 2 PCs and an android as well).

        $7.99 is a flipping steal to us. We'd gladly pay 2 to 3 times that for even more streaming content, especially if there were newer releases available. If Netflix could push out the movies at the same time they come out on Redbox, we would pay $25 per month and be quite happy doing it....because it was save us the hassle of going to Redbox and remembering to return that stupid (easy to RIP btw) DVD that the movie companies seem to have such a love affair with.
        VRSpock
      • RE: Netflix's latest show: When creative destruction attacks

        @VRSpock...
        I'm glad you think paying 7.99 to do what you can do cheaper is a "steal". Its people like you who keep Netflix in business, people who think they are getting a great deal on something that costs next to nothing and can be found cheaper elsewhere.

        For most of the rest of us, Netflix has outpriced themselves. When I first signed up it was a great deal for its time. It cut my having to reserve stuff at blockbuster or hollywood video (Notice that both of them barely exist anymore, blockbuster in mostly name only). It made things a lot easier for me. Then I made the move to streaming while retaining the DVD service. I found NetFlix's steaming to be quite shoddy at best, on some days totally inaccessable despite having FiOS that easily handles large data transfer rates than netflix should ever take.

        Long story short when they decided to hike prices while providing less content I passed. To date I've gotten 3 offers from netflix for reduced rate plans to try and coax me back. I've moved on and found cheaper and better alternatives to the Netflix plans.
        Relorian@...
      • RE: Netflix's latest show: When creative destruction attacks

        @Sevrinus@...You are talking truisms but aren't taking into consideration the rampant collusion that is taking place, the unspoken agreements and the price-fixing. Look at cell service, air fares, gas prices, virtually anything. If tacitly all companies producing X agree to charge within a certain price for X, give or take small fluctuations, they ALL will no matter what the real cost of the product. Look at coffee as an example. it costs less than 18 cents US in beans to make a coffee, but because Starbucks has made it ok to charge 3 bucks, every other coffee shop charges that regardless. This type of fixing goes on in every industry, once prices are established, there is little incentive to go much outside the "norm". Life isn't as simple as your opinion would require.
        trefire
      • RE: Netflix's latest show: When creative destruction attacks

        @VRSpock@... Honestly, this is the attitude why we keep seeing corporations raise their prices. Even if you feel this way, its better to keep it to yourself than allow the companies trolling these boards to feel justified in their actions. Recently, I heard my children confusing the term "need" for "want". We don't "need" Netflix or other streaming services. Somehow, entertainment companies such as Netflix along with ISPs, cable, satellite, etc continue to overcharge for services simply because we are spoiled. Amazing that in this economy, these companies have barely missed a beat. Are we choosing entertainment over important things?
        Don in MO
      • RE: Netflix's latest show: When creative destruction attacks

        Relorian@..<br><br>You are right. Netflix should be paying me so that my family and I can stream 300 to 500 hours of entertainment per month. Since they don't, I should be stealing all the content I can on bit torrent.<br><br>That seems to be the attitude of the people behind this negative press. It's called an entitlement mentality. <br><br>No, you should not be paying $200 per month for television....or even $100....but $25 is very reasonable and $7.99 is practically free. I mean, I can barely get a cheeseburger, coke and fries for a single meal for that....but people on here seem to be complaining that $7.99 is too much for a month's worth of entertainment.<br><br>Get REAL folks.
        VRSpock
      • RE: Netflix's latest show: When creative destruction attacks

        @Sevrinus@...The difference between NETFLIX raising there prices and things we need, no one needs NETFLIX, they want it, yes, but they don't need it. I am sure allot of streamer's was happy because they didn't want the DVD option anyway. Myself, I could care less about either product. I had the service because it was simple and cheap but when that greedy grab bag raised the price by 60% for both, well, that is when I got off the ride LOL... I don't need it, I have HBOGO, EPIXHD and MAXGO, with my cable provider I can stream all three from anywhere I am. Yes you have to subscribe to them but it is nice to be in the Airport and stream a movie on my smart phone while waiting on my plane. Corporate Greed cost him a ton on his stock. It seems like it is always someone at the top that thinks no one at the bottom will care if he gets deeper in your pocket. OOPS, that was a mistake a blind person could see coming.
        bethereornot
      • RE: Netflix's latest show: When creative destruction attacks

        @Sevrinus@...
        Itunes never deilivered disk media and no one complains.
        There are a multitude of streaming only services, no one bugs these services to deliver DVD's.
        Increases in shipping costs make delivering DVDs and streaming movies too costly. Price of netflix has gone up for only those who have DVD shipping service.

        Unlimited streaming shows for 8 bucks a month is still a great deal.
        Bakabaka
    • RE: Netflix's latest show: When creative destruction attacks

      @johnfenjackson@...I totally agree with you. It is all-pervasive. Look at cell phone costs and wireless data as a prime example of what we all accept. They've all just collectively agreed to gouge the consumer, there's no incentive for new companies to lower prices when everyone else is buying the grotesque over charging (2g data for 25USD?!) We have GOT to question this as consumers. The only reason people reacted to Netflix so strongly is because the contrast was so clear between the two delivery methods and they got ahead of themselves with the over charging. They would have done better for themselves had they left the arrogance until after they had cornered the market that way no one would have noticed or complained.
      trefire
    • RE: Netflix's latest show: When creative destruction attacks

      @johnfenjackson@... Corporations ALWAYS charge the amounts they think will work best for them. This means making as much profit as possible, now and in the future.

      So, perhaps they charge a bit less to prevent competition from taking away more. As their costs lower, they will make adjustments in response to what they think will work best for them. Charge too high a margin and people create competition because they see the money is there.

      There is nothing intrinsically evil about wanting to make a good profit. What we need to watch for is when they take actions to have the state intervene on their behalf to either make their products mandatory or to stifle competition.
      richard233
      • RE: Netflix's latest show: When creative destruction attacks

        @richard233 I totally agree with you. Cartels only work by state/mob interventions.
        grandadmiralmcb@...
    • RE: Netflix's latest show: When creative destruction attacks

      @johnfenjackson@...

      You seem to overlook the most important aspect of your one key principle:

      Corporations CAN NOT PASS ON COST INCREASES to customers.

      Netflix, for many years, was clever enough to negotiate extremely affordable content, especially the junk that constituted their streaming library. Now the studios have woken up, no longer giving away the store, and the public now has demand for multiple streams per household - Netflix's cost, especially for streaming, is going through the roof. Add to that the pending battle over bandwidth - Netflix will surely have to pay to assure delivery, and there was no way they could just give away streaming.

      Reed Hastings is a tool, as are many CEOs. He definitely mishandled the delivery - but he wasn't off the mark. Consumers were given a choice.

      If CableCo, TelcoTV, or even Dish/Blockbuster offer up a better value, we'll flock to it. Amazon/Roku/Redbox may make noise, but they'll face the same bandwidth issues, and they have no content. Microsoft has already folded, and Google is, as usual, clueless. Netflix has little to worry over.
      zdmo
      • &quot;Corporations cannot pass on cost increases to customers&quot;

        @zdmo

        That one statement glaringly shows your lack of knowledge regarding basic accounting & legal principles...
        spdragoo@...
    • RE: Netflix's latest show: When creative destruction attacks

      @johnfenjackson@... I agree, I'm still waiting for my savings by going with paperless billing. I keep seeing my bill get bigger, not smaller.
      trust2112@...
      • RE: Netflix's latest show: When creative destruction attacks

        @trust2112@... that's because you are talking about low margin businesses, they have to cut down or they will lose money. Personally I don't do paperless unless forced to. You are owed nothing.
        stano360
    • RE: Netflix's latest show: When creative destruction attacks

      @johnfenjackson@... This is very ignorant, you realize that Amazon, Netflix and many others are not making a ton of money? They are vying for margin. Rare is the company like Apple that can command 25% profit margins in a cutthroat business.

      Cell phones, gas and many other products and services are based on thin margins. Corporations have NO choice, most are banking on future savings! Companies that don't pass on the savings will be gone.
      stano360
    • RE: Netflix's latest show: When creative destruction attacks

      @johnfenjackson@... Netflix will continue to loose customers.
      ktucker4617@...
    • RE: Netflix's latest show: When creative destruction attacks

      @johnfenjackson@...

      The NetFlix fiasco doesn't really have much to do about passing on "cost benifits" to anyone.

      It's simply a company that decided to think completely from the perspective of what might be good for themselves, without ANY consideration of how this might impact the desireability of their products to actual consumers.

      Yes, it looked like a great idea from the balance sheet to raise prices 60% and cut the company into two separate business units.

      But (and can you imagine the one guy at the meeting who dared raise his hand and tell the truth?): Customers DIDNT WANT to pay 60% more for the same product, and DIDNT WANT to have to use two completely different websites to perform activities which they had specifically liked handling from a single hub?

      And then, as the marketing morons got the message in the one and only way they can (massive profit loss hammer to the forehead), the great "recovery" plan was to reverse half of the bad decisions...

      Um... Wanna be sorry? Back the whole thing out, decide your company doesn't exist if you can't offer a product people want, and they DONT WANT what you're offering.

      Netflix will be a textboook case stufy in taking a solid, well respected brand, and running it into the ground in the name of screwing around with a winning package without ANY thought about offering a great product as opposed to trying to force customers to dance in a manner that might yeild more profits if the marketing staff's completely imaginary projections hold true.

      Here's a new idea: Make a GREAT product. OBSESS over improving it from the customer perspective. Price it aggressively. Make money.
      spark555
    • OMG it's not rocket science!

      With the combination of DVD and streaming, Netflix offered a good assortment of movies... albeit not the newest releases due to backroom dealings between the content producers and other distributors (owned by the content producers). Independently, the DVD service had the newer and more desirable movies, but lacked the convenience; the streaming had the convenience, but severely lacked desirable (and sometimes reliable) content. So to ask customers to pay 100% more to keep the same value, or choose one service with it's lesser value is just ludicrous... unless you're the only game in town. Does Netflix know that Amazon offers streaming for it's Prime members (with other monetary benefits like free two day shipping from amazon.com) for about $9/mo... or less than $3/mo for students? OMG you'd have to be brain dead to not expect the poor outcome Netflix experienced!! All of this may have been necessary for their survival, but ultimately not enough without addressing the lack of "complete" value of their streaming service.
      Lackosleep