Netflix's lost year: Four management lessons

Netflix's lost year since it raised prices, botched the de-emphasis of its DVD business and handled customer relations is one for the record books, but the lessons learned will stick around for a while.

CNET News' Greg Sandoval has a great account of Netflix CEO Reed Hastings' miscues and the aftermath as the company transitions to streaming. Here's a look Netflix's mistakes:

Hastings believed his own press clippings. Hastings could really do no wrong before he decided to split off its DVD unit and raise prices. The bet on streaming made sense. The hubris toward customers didn't. Creative destruction is fine and sometimes hurt. Creative destruction to customer relationships is deadly. Hastings seemed to believe Netflix was vital to people. Anger didn't fade.

Team alienation. Hastings lost focus on key executives and their input. As a result, many execs responsible for growing Netflix bolted. Sandoval reports:

Few people who had worked for Netflix for any length of time were surprised that there wasn't more discussion about the plan. As Netflix's business blossomed and as he was personally applauded in the press, Hastings had grown much more confident in his own decision making, less receptive to taking advice from his senior management team. What's more, few of the people who could persuade Hastings or tell him he was making a mistake were around anymore.

Data can foretell the story, but you can be premature with the conclusions. Netflix's internal data showed that interest in the DVD business was waning. However, the DVD business was still a cash cow that could be milked. It's obvious that Netflix's future was streaming media and acquiring rights to content. The cash cow that could have paid for the streaming future was the DVD business. Netflix apparently failed to stress test its assumptions on the price increases and rejiggering of the DVD business. The shocking thing about Netflix's DVD business issue is that it had a case study called AOL. AOL is an ad-based business, but still milks its Internet access unit. And yes, people still get access through AOL.

Misreading the customer base. Hastings biggest issue was that he flubbed customer communications. He was sorry that he upset subscribers, but bet that they wouldn't cancel the service. Netflix's message: We upset you, but you still need me. Netflix was like a husband daring his wife to leave him.

Whether Netflix fully recovers remains to be seen. One thing is certain, business school students will be examining Netflix's lost year for a long time.

Related:

• Netflix's rough weekend
• Netflix's Qwikster retreat makes sense, but looks skittish
• Netflix’s mea culpa disaster: ‘Seems like a panic move’

• Netflix wrestles with innovator’s dilemma; Customers pan ‘Qwikstupid’ idea
• Netflix cuts subscriber targets: Customer rebellion or just a blip?