The dramatic implosion of new media TV darling Netflix will be a lesson in 21st Century business school courses. It’s an example, frankly, of applying old hierarchical business thinking to the age of the Great Horizontal, and every traditional media institution should be taking notes. If you want to know how to FAIL in the new world, take a look at what Netflix did almost overnight.
First, a 60% rate increase for its DVD division. Then renaming the division. The business school types all head-nodded, because the money is with streaming, and this is where Netflix wanted all its customers to go. I’m not sure if it was the cavalier attitude that accompanied the announcements or the sheer underestimation of its customers, but the whole thing has blown up in its corporate face.
This week, the company reported it had lost 800,000 subscribers, and in a letter to investors dated October 25th, the company said, “We greatly upset many domestic Netflix members with our significant DVD-related pricing changes, and to a lesser extent, with the proposed-and-now-cancelled rebranding of our DVD service. In doing so, we’ve hurt our hard-earned reputation, and stalled our domestic growth.” Netflix stock tumbled 35% today, continuing a slide of 104 days during which the company has lost $12 billion in market value, all over this strategic blunder. The stock is down 56% year-to-date.
The Netflix miscalculation is one that we’re going to see repeated over and over again, and that is that you can’t behave this way in a hyperconnected universe, because horizontal disapproval spreads instantaneously. It also opened the doors for rivals to come to the rescue, and this is a powerful and important lesson for anybody doing business in the 21st Century. Netflix was once a story of incredible success through serving the needs of customers efficiently and with class. It was a textbook disruptive innovation, but in its quest to be king of the mountain, it shot itself in the foot.
Netflix is still a major player in the world of film distribution, but it’s very doubtful it will ever get back that which it has lost. When Rishad Tobaccowala said in 2004 that we’d “entered an empowered era in which humans are God, because technology allows them to be godlike,” he followed it with a question: “How will you engage God?”
I suspect Netflix is taking that a little more seriously today.