For Netflix, weaker was supposed to be stronger
Poor Netflix has had a rocky six months. It’s like having a friend go into complete, total meltdown and trying to decide when you should start planning the intervention.
After Netflix announced it was splitting its streaming and DVD delivery services into two separate companies, they made a complete 180-degree turn and combined the services again.
Just this week, Netflix announced their Q3 earnings, and while they met expectations, they lost 800,000 subscribers. Now the market is punishing them. In after-hours trading just after the announcement, they lost nearly 30 percent of their stock value. In opening trading the next morning, they were down another 10 percent. While all that loss may not have been avoidable, the industry is wondering why Netflix decided to make this move so quickly.
Colin Dixon of The Diffusion Group (TDG) succinctly referred to this whole event as “premature bifurcation.” And he’s right – many of us within the industry may have seen this split as inevitable, but the timing and the way Netflix has handled this announcement hints at a larger, more complex situation.
Why break up with yourself?
Why would Netflix choose to split itself apart? And why completely change the name and make two different services to interact with their company?
It all started with the Starz negotiations: Netflix landed a great deal with Starz in 2008. For only $30 million, Starz gave Netflix access to some pretty good movies to stream because the perceived value of streaming was very low at the time.
Fast-forward to 2011. Netflix is now available on so many devices and touting the largest subscriber numbers for a MSO, so the perceived value of that license goes up quite a bit. This makes it a lot harder for Netflix to negotiate cheap prices; hence the very public break up this summer.
So, how does Netflix improve its bargaining position? Oddly enough, by weakening themselves (or at least appearing to be weaker), they position themselves to negotiate for a better price. Let me explain: by splitting the two entities apart, they show much lower subscriber numbers to potential licensees as reasoning for lower pricing. By still having the two companies under one roof, Netflix gets to play the beggar during negotiations for streaming in regards to subscriber numbers, while still offering combined DVD & streaming licenses as an incentive. Therefore, a “weaker” Netflix might have been stronger from a negotiation standpoint.
The problem is, they couldn’t come out and just say that, so instead we get the standard Netflix hubris, disingenuous apologies, and some new branding. And ironically, now Netflix is much weaker than it planned.
Experience teaches at the cost of mistakes
Despite all the missteps, I still would like to see them succeed. Netflix may be down, but they definitely aren’t out of the game. Let’s face it, they still have the largest online subscriber base for video content, they have announced rollout plans in new markets, and have recently announced some great new content deals.
Unfortunately, the industry is still learning what customers do and don’t want. Netflix is our canary in the coal mine as they find new and exciting ways to create a burgeoning business model while pissing off content makers and alienating their own customers in the process.
If Netflix doesn’t rebuild itself soon, then maybe it is time for that intervention. And if this WSJ article is correct, that intervention could come in the form of takeover interest. Either way, to regain subscribers and prove the streaming business case, Netflix needs to get back to signing content deals.
Andy Beach is Vice President of Marketing and Product Development at SeaWell Networks, a Canada-based company that specializes in online streaming video delivery.
Image courtesy of Flickr user jcoterhals.
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I highly doubt that a Disney or a Sony is going to accept the argument. If you were the studios, wouldn’t you just point out that this is likely a blip AND “you need us more than we need you” (because we can and will go direct as well)? Of course, they do want the NFLX business but only at the right price and certainly not assuming that subs is going to continue its single quarter of decline.
I would not like them to succeed. The stupid company/ceo betrayed his customers, faked an apology, tried to bypass everyone with disrespect. why would anyone want them to succeed? absolutely inappropriate.
Hey Andy – great post – but I would question whether license holders would buy the ‘smaller, weaker’ gambit you’re suggesting here.
I think they are painfully aware of what Netflix represents and how disruptive it is to their business-as-usual.
Hollywood is such a bravado-filled, dog-eat-dog and fortune-reversal laden industry; my take is they’d more liable to punish weakness, not reward it. Beyond that, there are too many very powerful, very interested parties (Apple, Google, Amazon) that have the coffers, the technology and the strong interest to pry open this market. I’d be wary of anything that puts the scent of blood in the water here.
In any event we can both agree on one point – this was a horribly mismanaged mess. A strange misstep for Hastings and one I hope he recovers from quickly.
I actually wrote a little rant on this whole thing during the first phase of the tailspin. I’d be interested to hear your thoughts on my counter opinion – http://www.mikeraffensperger.com/blog/netflix/
I’m amazed I don’t hear anyone touting two of Netlflix’ greatest strengths… the content rating community they’ve put together, and more exclusively, the excellent content suggestion algorithm they’ve worked so hard to refine. No one does a better job of this than Netflix, though Amazon has also put tigether a decent content rating community.
I think many will flock back to Netflix as they realize how much they’ve depended on these two aspects of the Netflix business model.
Content ratings and suggestion algorithms mean nothing when there is a dearth of content to deliver. I did about 8 searches this weekend on streaming content for my wife and I and/or the kids, what we got was a whole lotta nothin’ and a sudden questioning around if the streaming was worth it.
You can only recommend what you can actually deliver.
I don’t think this argument holds. Netflix could have easily used the audience split in negotiations without actually having to split the audience bills. I think they were truly trying to maximize revenue and naively assumed they could do it heavy handedly.