Monday, September 19, 2011

Lesson #94: Netflix--A User Experience Meltdown

Posted By: George Deeb - 9/19/2011


& Comment

This morning, I received an announcement from Reed Hastings, the CEO of Netflix that they were splitting their business into two divisions, Netflix for streaming movies and a newly created Qwikster for DVD movies by mail, including a long apology for not communicating better with their customers regarding the rationale around key decisions.  Hastings obviously didn't practice what he just preached, as Netflix obviously didn't first test the potential impact of such action with their users (as we learned to do back in Lesson #73).  The consumer reaction, including my own, has been pretty negative based on today's posts on the Netflix Users' Blog.  So, based on this, I thought Netflix would make an interesting case study on what to do (or more importantly, what not to do) from a user experience perspective.

But, first, a little history about Netflix's mounting woes over the last few months: (i) they announced a separation of their DVD services from their streaming services (which resulted in me paying 25% more than before for both services); (ii) they lost their major content deal with Starz, one of their only premium providers of high-quality current movies in their offering;  (iii) their forecasted users for this year are 1MM less (5% less)  than they estimated they would be at the beginning of the year, based on these actions; (iv) their stock price has cut in half (from around $300 per share to $150 per share), as a result of the above; and (v) now, we have this splitting of the business into two divisions, which is going to require users to maintain activity, ratings and queues at two separate websites, one for online streaming activity and the other for offline DVD rentals.  I just don't think consumers will ultimately play that game, and Qwikster (or Netflix's DVD rental business) will most likely suffer a "Qwik" death.  This is probably Netflix's long term goal anyway, but what a very strange business decision for Netflix to make given the company still has the majority of its customers still using the DVD rental services today.

So, what has Netflix done to its consumers in the last couple months: (i) they are making them pay 25% more for bundled online and offline services (or forcing them to pick one or the other); (ii) they are losing current high-quality movie titles, which is particularly evident on the streaming side of their business which they desire to promote long term; and (iii) now, they are forcing customers to maintain two different websites, instead of one, which is a big ask of 12MM people (the 50% of their total business which desires both online and offline services).  Obviously, consumers are not responding well to these actions, given the 1MM lower members than estimated this year.  And, the financial markets haven't responded well, with the 50% decline in Netflix's stock price in the last few months. 

So, how did Reed Hastings get himself and Netflix into such a mess?  The answer is really quite simple:  they put their business goals in front of their customer goals.  And, sometimes you need to do that if your underlying business economics are flawed, like Netflix's were  (e.g., the need for a price increase to cover the cost of licensing the content--which would have been fine if communicated that way as a better option than going out of business).  But, this most recent move may ultimately get the whole house of cards to fall in on itself, when and if 50% of Netflix's customers decide to unsubscribe from all or part of the service.  Let me explain further.

At the end of the day, what are the challenges with Netflix's business: (i) it is much more expensive to fulfill mailing DVDs to home, than simply streaming them over the internet; (ii) high quality current content is very expensive to license from the major film studios, especially within the first 28 days of the home release; (iii) the studios get a lot less revenues from DVD rentals, than they do from cable on-demand or internet streaming (e.g., former simply requires Netflix to buy DVDs, and the latter charges Netflix on a per-subcriber basis for the service); and (iv) the markets are very bearish on the DVD business long-term, and Netflix doesn't want that albatross around its neck in the financial markets (in business practice or in name).  So, when you look at Netflix's business this way, it is very easy to see how Netflix has ended up where it did.

I have been a huge fan of Reed Hastings, who has lead meteoric growth at Netflix and a real change in the way consumers watch movies (including the demise of former retail titans like Blockbuster).  And, I have been a loyal Netflix customer for years, despite the ups and downs of their business.  But, this most recent move does not sit well with me, hence the post. 

I sure hope they figure out a winning long term business model, one that puts the customer first with (i) high quality current movies; (ii) that I can watch within the first 28 days of home release; (iii) via online streaming (or offline, if needed); and (iv) at a price that makes sense to Netflix's business (and is affordable to me).  Because, I am sure the major studios are trying to figure out how to offer this service directly themselves (to cut Netflix as middleman out of the way), or in partnership with the major cable companies via on-demand services.  But, the last thing I want to do is be forced to re-rate 1,691 movies watched on a different service, so they know what movies I have seen and which ones I haven't seen, in order to get their recommendation engines correctly working  (where Netflix is the pro and clear first mover).

So, the key lesson here:  put your customers' user experience first when making key business decisions.  You should always be aspiring to give your customers more and more (and make your user experience easier and easier) over time, not less and less (and harder and harder).

I am curious what you think. Add your thoughts in the comments section.

For future posts, please follow me at:

Red Rocket is a featured contributor on entrepreneurship for many trusted business sites:

Copyright 2011- Red Rocket Partners, LLC