How Netflix Lost its Glamor and its Way

“You can’t punish yourself into change. You can’t whip yourself into shape. But you can love yourself into well-being.” — Susan Skye

How did Netflix get into so much trouble? How did the darling of American video culture suddenly and greatly annoy millions of customers? Is the love affair over? How would Apple have handled it all?

Here’s what I think happened. Netflix was the fortunate beneficiary of a cultural avalanche. Customers wanted to watch movies on their own good time, many didn’t have a good broadband connection or even the hardware and software for streaming, some were unhappy with network TV or perhaps just wanted to catch up on theatrical releases, and (to put it politely) having a copyable DVD in your hand is a tasty morsel. It was a fortunate chain of events and a happy confluence of technology and customer temperament.

When that happens to a company, it’s all too easy to become complacent about what made it successful. Executives may have confused the success of their finely tuned warehouse and mailing system with the kind of hard won success Apple earned — after many bumps and bruises. Netflix never attended the school of hard knocks.

However, when you do go down a difficult path, as Apple has done, you learn to prepare for problems. It’s important to size up industry trends, anticipate problems, and then translate your internal mandates into something the customer can understand. Let’s look at what Netflix did instead.

1. Netflix didn’t seem to anticipate the popularity of Blu-ray. Contrast that to Apple, a company that always moves relentlessly forward. As a result, Netflix suddenly singled out Blu-ray customers and penalized them for their enthusiasm and new home equipment. Raising the rates on everyone just a little bit might not have been what one would call absolutely fair, but distributing a much smaller cost over the entire customer base is a tried and true mechanism that other companies have used with success.

2. Next, Netflix, for no imaginable reason, eliminated the facility for users to manage their queue on one of the most insanely popular devices to ever hit the consumer electronics market, the iPad. Surprise and delight was erased overnight. That was strike two.

3. When Netflix discovered that their streaming business was taking off, they realized that they needed to strike more and more content agreements with content providers. I suspect, sensing an opportunity for easy cash, the content providers started forcing Netflix into expensive contracts. Netflix had no choice but to start charging for streaming.

Develop a Sound Vision

A shrewder group of executives would have realized that streaming would become the future and never have provided it to DVD renters for free in the first place. If a thing has value, and it costs you money to obtain and deliver, you charge for it. Good CEOs know that. Customers who wanted streaming content would have a choice: pay for streaming or forego it. Instead, Netflix gave away something of value, acclimated the customers to an entitlement, then abruptly shocked them with the real costs. Compare that to Apple TV where, if you want something of value, good content without commercials, you pay for it. Strike three.

My recollection is that Netflix had decided that it would let the DVD business slowly die on its own. That’s probably a good strategy because there are still millions of Americans in rural areas without good broadband. They’ll rent DVDs for years.

Don’t Panic

I suspect something happened along the way. Perhaps Netflix perceived that competition was growing scarier (Cable VOD, Dish + Blockbuster, Apple, Hulu). Perhaps they worried that without those millions of red envelopes on millions of coffee tables, all day long, they would  become just another disembodied streaming service.

Perhaps Netflix execs panicked at the thought of the U.S. Post Office prematurely terminating Saturday delivery, something the U.S. Congress has resisted vigorously for years. It’s far from clear that termination is imminent, and it’s even less clear that the absence would damage Netflix’s business. People adapt.

In any case, Netflix seems to have decided that it wants to kill the DVD by mail business faster than it had planned, and then, with that false sense of alarm, decided that it didn’t want the Netflix name and business dragged down by the demise of the DVD by mail business. So, like a bull in a china shop, they created Qwikster. Apple, in contrast, has a neat way of telegraphing* its intentions, then delivering delight and surprise, usually offsetting some bitter necessity.


In the process of making all these hasty decisions, there wasn’t time to explain to the customers what was happening and why. A dizzying series of changes and price hikes and the inconvenience of two sites and two queues to manage descended on customers faster than they could absorb them. Reed Hastings never developed a rapport with his customers, via keynotes, like Steve Jobs has. He never told us where his company was going, what it needed to do, and never gave us a chance to absorb and decide. We weren’t made to feel as partners moving forward.

Instead, we got an apology that didn’t really ring true, after the fact, after we’d been bulldozed.

I don’t think Netflix is going out of business. But I do think that recent events have been a wake-up call. Customers like companies that carry them along for the ride, explain what needs to be done, provide time to absorb it, take some feedback from external counsel, and then give customers something good along with the bad. I think we’ve been spoiled by Apple.


* For example will anyone be surprised if the next generation MacBook Pros have only SSDs and no optical drive? Wasn’t Light Peak/Thunderbolt fairly well laid out to us before the first Macs that use it shipped?