The Meteoric Rise and Fall of Netflix

In 1997, Reed Hastings and Marc Randolph created a company called Netflix. Hastings was angry about a late fee charged when he turned in the movie Apollo 13 after the due date. His business was about to change the entertainment industry forever and evolve into one of the most recognized brands in North America.

The Business

In 1999, the company evolved. Late fees and shipping fees were removed. You could manage your movie queue online and Netflix would ship you the next DVD on your list. When it arrived, you could keep it as long as you wanted. When you were done, you just sent it back and the next movie on your list came to your mailbox. The company also looked at your rental history to suggest movies you would enjoy.

That business model worked well, but Hastings was not one to wait for the trend to pass him by. While he was eating away at companies like Blockbuster and Hollywood Video, Hastings introduced a new product that would compete with pay-per-view cable and satellite providers. Netflix streaming revolutionized the way many of us watch movies and television. Through your computer, game system, web connected TV, or streaming device, you could just watch a streaming video on demand using your remote.

It changed the way I use my TV. I cancelled cable and get most of my entertainment from Netflix for a flat rate.

The Money

People loved it. By 2009, the company had grown to 10 million subscribers, most of whom were loyal to the company based on great customer service and reasonable prices. The 2002 IPO at $15 per share was just the beginning of a meteoric rise. As the subscriber numbers grew, so did the profit. As profits rose, the stock price skyrocketed. The stock split in 2004 and remained relatively flat until 2009. That year, investors took notice. The stock ballooned to over $50 per share by the end of 2009 and $175 in 2010. It seemed that Reed Hastings could do no wrong.

2011 kept the momentum going. By mid-2011, the stock broke $300 per share, reaching a peak of $304 in July. That is when Hastings screwed up. He screwed up bad.

If It’s Not Broke…

If something is working really well, it is probably not a good idea to piss off your entire customer base. While changes to the user profiles and site layout annoyed a few customers, the business model and pricing had been unchanged in quite some time. Rather than make a small increase to offset rising costs, Netflix split the DVD service and streaming service into two products giving customers an effective price increase of about 60%.

People were not happy. Thousands of customers fled the service. Then tens of thousands. Then hundreds of thousands.

Then they made it even worse. Hastings announced that he was sorry for upsetting so many customers, but that rather than make them happy, he was going to split the DVD service into a new company called Qwikster. The seemingly poor planning was bad for the company and agitated subscribers. More customers walked away.

The Fallout

On October 24th, 2011, just minutes after the markets closed, Hastings announced Netflix’s Q3 2011 earnings. They were not good. 800,000 subscribers cancelled. The company is on track to a net loss. The stock plummeted about 35% on October 25th. From its July peak, the stock was down 75% or $227 per share. Ouch.

The Lesson

If you are an entrepreneur, blogger, manager, or business leader, don’t fix what is not broken. Don’t alienate your customer base. Don’t make people feel like they are not being listened to. Don’t follow a mistake with another mistake that is just as bad. Don’t scare away nearly 10% of your customers and see service level declines for thousands more.

Reed Hastings revolutionized entertainment, but he will not be remembered for that. He will be remembered for raising prices 60%, the Qwikster debacle, and the 75% drop in his share price in three months. He will be remembered for breaking the rule that took him to the top: keep your customers happy.

How can you apply these lessons to your life? If you are a blogger or entreprenuer, what can you learn from Hastings’ mistakes? Please share your thoughts on those question and the Netflix story in the comments.

Image by Marit & Toomas Hinnosaar.

6 thoughts on “The Meteoric Rise and Fall of Netflix”

  1. I agree that you shouldn’t try to fix something that’s not broken. In fact, I was one of those Netflix customers that left and I am proud to say that. I don’t want to support that kind of rapid change and increase in profit for the owners. However, there should always be room for improvement and resist the product being stagnant. If you aren’t improving your blog or making it more user friendly, changing with the technology, you will find yourself losing popularity at one point. That’s my theory – I don’t have the experience to prove it… (im working on a new blog design as we speak)

    1. For me staying on was worth it. I saved $70 per month by cutting cable and use Netflix as my primary entertainment source these days.

      G0od point on always improving. I agree 100%. If things ever sit still for too long, they will get stale and boring.

  2. I am a very strong believer in not fixing something that is not broken. It never usually works, just makes things worse. Netflix was doing so great until they ruined it all. Too bad. Maybe they will change their mind. 🙂

    1. They did change their mind on the Qwikster part, but I doubt they will on the price change. I read an interesting article about how they raised their prices 60% and lost about 3% of their customers. I wonder if they profits will follow.

    1. I am sure there will be a Harvard Business School case project on Netflix that will quickly spread to b-schools around the world.

      Their PE is 18.86 right now. That is pretty average for the industry.

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