Netflix – Good Strategy, Bad Execution?

Read this interesting piece on cnet about Netflix’s problems last year, and their CEO Reed Hastings. The author blames, not in these exact words, Reed Hastings for everything that happened, and hints at hubris as the cause.

After reading the article twice, the only fault I can find with the initial decision (of separating DVD & Streaming subscriptions, and increasing prices), is in the way it was rolled out. The decision itself seems strategically perfect.

In fact, had they not so messed up with the execution of that strategy, that decision should’ve gotten Mr. Hastings a standing ovation for foresight and business acumen.

With the benefit of hindsight (and probably even without it), here’s how I think the strategy should’ve been executed:

  1. Limit the number of movies/shows available for streaming to about half of what the median user was streaming. Don’t mess with the price.
  2. Offer a separate unlimited streaming package for $7.99, as they did.
  3. Offer a separate unlimited DVD only package for $7.99, as they did.
  4. DO NOT offer an add-on unlimited streaming bundle to the 1st option for $4.99

This laddering of subscription options will slowly filter the customers into one of the three buckets. Moreover, the lack of the 4th option will help push more customers into choosing one of option 2 or 3, instead of staying with option 1.

Now, keep the new pricing for a year. End of the year, if a majority of the customers are still on #1, increase the price to, say, $14 while still keeping the cap. If not, retire the 1st option forcing the users to choose one of the other two.

Using this ladder & stagger manner,

  1. doesn’t make the users feel like they’re being sucker punched on pricing.
  2. lets the users filter themselves into one of the new buckets without feeling they’re under an ultimatum to do so.
  3. lets the market confirm your business strategy before you’ve made the final split.
  4. reduces the negative voices when you finally decide to remove option 1.

Unless there was some internal politics at play, or pressure from content providers (Hollywood studios or, maybe, Starz), there doesn’t seem to be a good reason for the abrupt, arrogant, even amateurish manner in which the strategy was executed.

Wonder if this could be cited as one of the few instances when having execution-oriented external business consultants at hand would’ve been helpful? :)

P.S.: The ex-consultant in me would love to get to play with the Netflix user data and see how the usage of DVD ordering and Web Streaming of videos had been changing over time, and, later, how the users were moving between three subscription buckets and predicting/projecting what the response to eliminating one of the buckets would be. [Note to self: That’s too long a sentence to belong on a blog!]

P.P.S.: I’m only commenting on the core execution problems, not on the related PR problems that the team at Netflix inflicted at itself.

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