Perhaps no company was as excited for a fresh start in 2012 as Netflix. They spent the latter half of 2011 in the news, and for almost entirely the wrong reasons. First there was the 60% price hike announced in July. Following customer outcry, Netflix CEO Reed Hastings offered an “explanation and some reflections” in September that only further confused investors and subscribers. At the top of the list was the surprising news that Netflix would be splitting into two companies. Seemingly hastily conceived from the start, the plan was scrapped twenty two days later. Ironically, in an initial effort to clarify the company’s position and reasoning, Hastings caused far more confusion.
Netflix’s missteps appeared so significant that when occasional competitor Hulu announced it was taking itself off the market and was no longer for sale, Boxee co-founder, Idan Cohen, speculated on Twitter that “Hulu sale call off is related to the opportunity Netflix opened in the market?“
The damage was clear – 800,000 lost subscribers in the U.S., shares plummeting 35%, and near unending analysis of the missteps and why Netflix was doomed.
On January 25th, the company announced the first good news in over six months: 220,000 new domestic streaming customers with another 380,000 internationally and revenue of $875.6 million. With an expected 1.7 million added customers for the first quarter, Netflix’s stock was up 15% and the outlook is once again fairly positive.
But in spite of the optimistic quarterly report, Netflix still faces many challenges. At first glance, content licensing and acquisition seems to be at the top of the list. If the failed Netflix-Qwikster split revealed anything, it’s that Hastings believes streaming is the future of the company. However as it currently exists, it’s not clear that it is a complete and worthwhile option on its own. Dennis Crowley, founder of Foursquare, shared that sentiment by tweeting “…Canceling Netflix. I NEVER used it cause streaming catalog is so weak. If I need a movie, there’s a @RedBox a few blocks away.” Exacerbating the issue, Sony Films were pulled from Netflix in the summer of 2011 and Starz announced it will not renegotiate a deal with Netflix to make its content available. This is particularly troubling considering that even with its new pricing, some have suggested there is no way Netflix can manage the cost of continually adding high quality content to its library, particularly in light of the first-sale doctrine.
By its own admission, Netflix does not chase the priciest and newest content. Highlighting this point, two of the most recent releases to the streaming service being touted on the member’s home page at the end of October 2011 were a Wayans brothers’ movie and “Beer Pong Saved My Life.” This would certainly appear to support the theory that Netflix’s problem is content related. In other words, “Content is King” and Neflix is serving up Beer Pong. There is probably little question that if Netflix streamed the most popular current films in addition to the American Film Institute’s top 100 movies, more people would become subscribers. However that assessment overlooks a significant factor.
While those two films are not exactly Oscar material, or even arguably tolerable, Netflix’s biggest failure, bigger than price increases, sub-par content, or splitting the company, is exactly that adherence to the “content is king” mantra. In a world where they cannot afford the licensing costs of an expansive and highly current library, they have made no effort to innovate the user experience beyond traditional linear tv. In other words, in a connected world of on-demand content where social and interactive opportunities are the twenty-first century norm, they have opted to retain the same mid-twentieth century viewing experience my parents grew up with.
As communities, social networks, and unprecedented sharing all expand online, “content is king” has been trumped by “community is king.” It’s not what you sell, but the environment that exists around the product and the overall user experience it creates. This is a significant point that Netflix has shown little interest in learning. In a world where they don’t have deep enough pockets to compete for the latest and greatest content, the experience they foster, before, during, and after viewing creates value and ultimately determines the success of their service.
Online music retailers are a prime example of this right now. While at first glance it might appear that Apple sells music at the iTunes Store, they are really selling the entire iTunes experience including, Ping, iCloud, and complete integration with all of Apple’s products and services. Likewise, Amazon and Google tout their cloud services and “music everywhere” in an effort to differentiate the same product (e.g., an exact duplicate of Beyonce’s latest single) from every other online music store. In each case, the goal is a unique user journey that creates additional value for the consumer.
But of all music providers, Spotify may have done the most to create a sticky audience and consumer. Instead of just offering what often amounts to features, they offer interactivity. In addition to social and sharing functionality, Spotify has upped the ante by repositioning themselves as less of a service and more of a platform upon which third parties develop interesting ways to use and package music.
Given that Spotify has created a blueprint, it’s all the more surprising that Hastings hasn’t embraced any significant change in how customers use and experience Netflix. The failure to distinguish the experience from other streaming services creates two problems. The first is that Netflix is largely replaceable since the only thing they provide is the video content itself. By not creating additional value apart from the content, be that social tools, playlists, a worthwhile API, second screen apps, etc., Netflix is increasingly interchangeable with any other on-demand service.
Bobby Calder, Charles H. Kellstadt Professor of Marketing and Director of the Center for Cultural Marketing at the Kellogg School of Management at Northwestern University, noted at TVOT NYC Intensive 2011, that it’s a common misconception that maintaining consumer satisfaction and high service factor is the singular method of combating churn. Instead, product innovation is an often uncited means of retaining customers. Netflix, of course, knows this because their streaming video service was originally a prime example of such innovation. In an undeveloped landscape of technological viewing possibilities, it’s this kind of innovation that could again propel Netflix ahead of the competition.
The second issue is that Netflix is missing an opportunity to create leverage to license additional content. As viewers gravitate towards a unique user experience, content distributors will certainly notice, increasingly conscious of the audience they are not reaching. In 2004, iTunes Store accounted for over 70% of the online music market with one million songs available to download. By 2005, the iTunes Store offered over two million songs and by 2011 had a catalog of over twenty million songs. According to Lisa Tiver, VP of Business Development at Rights Flow, “You can’t afford to not be on iTunes. It makes it hard for publishers to say no to their terms.” In short, content distributors will be under greater pressure to license their content if Netflix offers a compelling experience that people can’t get elsewhere.
Verizon and Redbox announced on February 6 that they are teaming up to provide a similar service to Netflix. And additional competition is likely on the way from Google, Apple, and Sony. Until Netflix creates unique features and experience, there is no reason that they won’t be increasingly vulnerable.