I'm going out on a limb here, but this whole Netflix mess? It's not Reed Hastings' or his company's fault. It's bigger than that. But let's take a look at how we got here.
A few years ago, I saw an interview of Reed Hastings and I thought he was a visionary. He grew his business organically, providing a service for a reasonable price. Starting with DVDs, he set up a system that, even though it was a mail-order service, actually felt incredibly fast.
The customer asked for a DVD via a website and it showed up in his mailbox in a few days. Then, Hastings moved to a subscription model and ditched late fees. Finally, he saw the future and went digital. You know the rest of the story: From Wii to Apple TV.
Now, it appears as if he’s no longer a visionary — he’s blind. He looks like another entrepreneur who has become a victim of his own success. In his blog, he even admits, “I slid into arrogance based upon past success.”
First, Netflix raises rates by 60% (I see it as tripling the rates for streaming). Then Hastings decides to split DVDs and streaming into two companies. He cancels due to the backlash. Why? What’s going on?
While Hastings has earned a lot of the blame, it’s more complicated than that. We’re in the middle of huge industry and societal transition — from material to digital. And it’s unsettling to a lot of people.
It used to be that you got something you could touch, see, taste, etc. when you paid money for a product. Now it can be completely esoteric and invisible.
Sure, you know what you’re paying for, but that doesn’t mean you can put it in your hand. Younger consumers have been ready for a long time. And, thanks to services like Netflix, FIOS, and U-verse, older consumers have finally come around. So why couldn’t Hastings raise rates slowly and phase out the DVDs?
The reality is a complex tug-of-war between three parties: consumers, Netflix, and the entertainment companies.
First, we have the consumer. Consumers were used to their subscription fees. So if you add 60% to my price, you’d better offer me something new. Netflix didn’t. However, consumers were, and are, ready to abandon DVDs and fully embrace streaming video.
Second, there are the entertainment companies. They’re operating much like the music companies did a few years ago. While they’re not quite as shortsighted, they are as greedy. And they’re trying to get as much from Netflix as they can. So they’re not going to let Netflix cut into their new-release DVD sales.
Finally, you have Netflix, which is a victim of its own success. Much like the iPhone, it has made technology easy and available to a huge audience. But new products cost money. While Jobs got wireless carriers to help with the bills, Hastings assumed that people would accept a price hike because he has such a great product. Try selling an iPhone for $800. I don’t care how good it is; people aren’t going to pay that much.
So you have consumers who are ready to make the change, entertainment companies who aren’t, and Netflix in the middle holding both sides of the rope.
But something had to give. Consumers are ready, but the streaming business model was getting too expensive. That means the entertainment industry needs to be realistic or Netflix has to raise prices. And we’ve seen the result. Here are the consequences so far:
For Netflix, it really only works with both services. DVDs don’t offer instant gratification and streaming doesn’t offer new releases. So doubling the price gives the consumer two choices: take it or leave it. Almost a million have left it. And the bleeding’s not over.
The entertainment industry is so busy trying to maximize its cut that it doesn’t see the pitfall of losing Netflix. No digital means a huge void, which could potentially be filled with piracy. That’s like putting money into a pocket that has a huge hole.
For consumers, it means more delays while corporations fight it out. Essentially, we lose.
One thing is certain, though: something’s gotta give. The transition is coming fast. Books, albums, and movies are going completely digital.
Whether anyone likes it or not.