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Killing the Golden Goose – Part 2

November 2011 Marketing 6 Comments

[EDITOR’S NOTE:  My initial article which ran in October has caused quite a stir.  I have received nearly half a dozen comments.  However, the story continues]

Reed Hastings, the CEO of Netflix (NFLX) has cemented his position on my Hall of Shame.

Whether hubris (outrageous arrogance) or stupidity, Netflix has taken an ill-advised price increase and transformed it into a runaway train that threatens to jeopardize the company.  The story began when Reed Hastings and his management team, after doing apparently no market research, decided to raise their prices by approximately 60 percent.  This action was taken amidst a continuous stream of record earnings, customer loyalty and a growing customer base.

Why did they do it?  The reason they gave is that one content source – Starz – has increased their prices to Netflix.  The real reason they did it – because they thought they could get away with it because the value they provided, they believed, should command a higher price.

The customer backlash was immediate and vociferous.  Hundreds of thousands of subscribers dropped the service.

So what did do Netflix do next?  They compounded the problem by offering two products – (1) the DVD mailing service and (2) the on-line streaming service.

Did that satisfy anybody?  Apparently not.  Soon thereafter Netflix decided that the two products were a bad idea and killed it.

So, what happened next?  Netflix’ Hastings projected that this heretofore paradigm of success will now start losing money.  Why?  Hastings told the Wall Street Journal that the losses were anticipated because of expansion into the United Kingdom and Ireland.  Hastings also said, “We made a couple of big mistakes this year.  It is up to us to own up to those mistakes and move forward.”

The investment community has not been so forgiving.  The aftermath of the first series of mistakes and indecisions resulted in a drop of 61 percent  in the market capitalization of Netflix.  The announcement of this week causes the second shoe to drop and Netflix lost another 26 percent in its market capitalization.  In all, this company that was valued at $16 billion before the initial price increase is now worth $4.6 billion.  It admits losing 800,000 subscribers in the third quarter.  [NOTE:  for readers who commented that it’s good business to lose a million customers if you can increase your revenues by 60 percent, the loss in Netflix’ market cap is Wall Street’s answer to this logic.]

Unfortunately, the story isn’t over.  Reed Hastings has simply opened Pandora’s Box.  There is a sleeping giant out there that is just starting to wake up.  It’s Blockbuster, Its brick-and-mortar business model was shattered by bankruptcy but Dish Network (NASDAQ—DISH) has picked up the pieces.  In so doing, Blockbuster still has 500 operating locations and Dish Network still owns the real estate for some 1,200 additional closed stores.

Blockbuster’s prices are the same as the old Netflix prices.  Its film library is just as extensive and it offers the advantage of people who can simply drive to location and exchange the DVD they just viewed with a new one – instantaneously.

The Dish Network/Blockbuster combination offers other intriguing possibilities for synergy.

There is another competitor, Redbox, a subsidiary of Coinstar, Inc. (NASDAQ—CSTR) who quietly raises its prices from $1.00 to $1.20 in its vending machines.  But Redbox is small potatoes.

The Netflix business model will not tolerate red ink.  The loss in market cap makes the company extremely vulnerable.  Direct TV or even Comcast might very well set sights on the distressed Netflix.  The DVD/Streaming business might be the next battlefield in the Satellite vs. cable war.



About the author

James T. Berger, Senior Marketing Writer of The Wiglaf Journal, through his Northbrook-based firm, James T. Berger/Market Strategies, offers a broad range of marketing communications, research and strategic planning consulting services. In addition, he provides expert services to intellectual property attorneys in the area of trademark infringement litigation. An adjunct professor of marketing at Roosevelt University, he previously has taught at Northwestern University, DePaul University, University of Illinois at Chicago and The Lake Forest Graduate School of Management. He holds degrees from the University of Michigan (BA), Northwestern University (MS) and the University of Chicago (MBA). Berger is an often-published free lance business writer who has developed more than 100 published articles in the last eight years. For more information, visit www.jamesberger.net or telephone him at (847) 328-9633.

James T. Berger
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