The Sad Saga of Netflix

Netflix stock is currently in the process of a market beat-down as traders and investors react to lower than expected subscriber growth (the stock has been down nearly 20% at times today). This appears to be fallout from Netflix’s decision to make subscriptions for their online streaming product and their mailed disc service separate. Up until recently, a single monthly fee (in the US) got you both DVDs in the mail and access to their on-line content through various devices (smartphones, tablets, notebooks and desktop PCs, AppleTV, game consoles). But, back in July, Netflix announced that a subscription was either/or, and if you wanted both, you had to subscribe to each individually. The reaction around the Internet was swift and loud: there were several voices objecting to this new approach, with some vowing to never use their service again.

Taken from the company’s perspective, this was about maximizing revenue. I suspect they felt, in their view, that people were paying less for something that could be worth more. I wouldn’t be surprised if there was an assumption internally that people were more likely to only use one service or the other. I also wouldn’t be surprised if that conclusion was reached using some skewed or poorly run “survey”, without any thought as to the survey design, respondent selection, etc. My guess is that it came down to numbers, and someone in the numbers part of the business wanted to know why Netflix was charging people once for two services, when they could be charging for each individually. Of course, this overlooks the reality that there are still many more movies on DVD than available on-line, and that a significant number of people will still want both, but didn’t see why they should pay more just to get both. This would be in light of the fact that people had both in one subscription, and were now forced to choose one or the other, or pay more for both.

Netflix clearly alienated some part of their subscriber base, and have convinced potential new customers to look elsewhere. I suspect that Netflix had a large number of people who were content with the service, and used both, because it was convenient (for streaming and mailed DVDs) and provided a broader selection than just on-line content. There was probably a level of complacency that prevented customers from looking too hard at other on-line services that might offer either better price or better selection. It is the “well, I already have ‘X’ and I’m happy, so why bother looking around” effect. I suspect that there were also a number of people who joined Netflix because it was convenient and offered great value, and they didn’t even bother looking hard at alternatives. Netflix was the “easy choice”, with very few barriers and very little friction in the decision process.

Consumers like choice, but once they’ve made their choice, most will stick with it rather than switch when they don’t have too. Some people are happy to try the latest thing, but inertia is a powerful force for many consumers. If they are happy with what they have, they are unlikely to switch to something else just because they can. But, when you force c0nsumers to choose, they can sometimes surprise you. When that choice is forced by an overt attempt to extract more money for what is essentially the same thing, then those choices are more likely to go against you than for you. This isn’t the same as upgrading (like when masses of people abandon one version of the iPhone for another. Their old phone may have worked just fine, they simply wanted the newer one, but they continue to buy into the iPhone itself). Upgrading is a vote for “more of the same, just newer”. In the Netflix case, the company said “you can’t have more of the same, you have to choose”. There was no “upgrade”, at least in the minds of consumers. They are being force to abandon their current product and choose a net new one. As a result, I suspect that many have decided that they will either forego the DVD service as a form of protest, or have decided to find other avenues to get their on-line movie and TV show fixes. Not only are current Netflix customers going to go, but some have probably convinced others to ignore Netflix and look elsewhere as well. Between negative recommendations from current or past Netflix customers, as well as negative press because of the July announcement, I don’t see that it could have any other effect than to have lower subscriber growth. There are fewer people interested, and that is further harmed by customers leaving the company.

The real problem for Netflix is that they are chasing away customers at a time where on-line inventories of older titles continues to grow. They are up against other streaming content, as well as against sales and rentals from places like iTunes. Netflix had a good thing going, offering the best of both worlds and giving the company a way to get people into their service and keep them for the long-haul. All they did was make a short-term decision that has cost them, both now and for the future. Can they fix this? Possibly, but only by either going back to the old model (one subscription, two delivery methods) or by radically cutting the price of both so that a dual-subscription costs about the same as the old one (unfortunately, I can’t get at the Netflix US site, it won’t direct me anywhere by Canada, so I can’t get DVD pricing. Canada only allows streaming). Netflix clearly has some fences to mend, and they need to think about the longer-term. Their short-term thinking has cost them.