Though TDG has long identified Netflix as an example of a successful OTT strategy - avoiding proprietary hardware, building a solid subscription library versus transaction-based VoD, etc. - we were disappointed by the recent strategic missteps undertaken by Reed and company. The price increase itself, though shocking to consumers, was not a mistake. In fact, it was inevitable. You can't write billion dollar checks to secure quality content without eventually asking subscribers to pony up. The question is rather (a) how to predict fallout, and (b) how best to manage it. This is where Netflix went wrong.
Imagine for a moment that a research firm could tell you within a reasonable margin of error how many consumers were likely to cancel the service because of your price increase and how best to deal with this exodus? How valuable do you think that would be to not only in planning a response but in spinning its likely impact? Priceless. TDG did just that.
Sure, all analysts and forecasters aspire to provide accurate predictions, and their reputation is honed from their material success. If you get it right, they can hang around a bit longer. If not, well, try to avoid talking about it.
When Netflix first announced its new pricing strategy in July 2011, TDG fielded a study of dual-service Neflix subscribers (those that use both DVD-by-mail and streaming) to see how the increased prices would play on Main Street. On the basis of this data, TDG predicted that between 2.0-2.5 million Netflix subs would cancel their service specifically because of the new pricing scheme.
According to Netflix's quarterly financials, net subscriber additions went from +1.8 million in Q2 2011 to -810,000 in Q3 2011, a net loss of 2.61 million paying subscribers during the period. No, not all of these customers were specifically motivated to drop the service because of the price increase, and not all were dual-service subscribers. And the Qwikster debacle was enough to make any long-term Netflix user second-guess the mental stability of senior management. No doubt this exacerbated the spike in subscriber losses, but any well-balanced observer would admit the price increase was the primary culprit.
True, the worst may be ahead for Netflix, with Q4 financials likely to reveal further sub losses, but the immediate impact was predicted (accurately) by TDG's analysis.
When asked if Netflix did any research on the impact these changes would have, Hastings flippantly said they did some focus groups on the "Qwikster" name and folks seem to like it.
Really? That was it? That was the extent of the "research" on which your company based a decision that led to a 75% decline in stock value and a massive brand collapse?
Reed, if you're paying attention, you might want to give us a call. You may need more help than you think.
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