These narratives speak to the company's value proposition, including the core jobs it is hired for and outcomes that it delivers, and equally, represents a commitment to deliver same consistently.
When well-managed, the brand creates a trusted bond that can materially increase customer loyalty and operating margins, while reducing the cost to acquire new customers. In the process, such brand equity is tantamount to free advertising, and also inures a nice 'halo' effect on the company's stock.
But, when a brand appears to disregard the promises behind its narratives, irreparable damage can come to the business.
In the packaged goods realm, Perrier is a textbook example of a company doing everything wrong in living up to the standards of its brand (when reports leaked out about the cancer-causing chemical Benzene polluting its sparkling water product), and never rebounding from this disconnect.
Tylenol, by contrast, is a textbook case of a brand coming back stronger than ever by living to its credo in the face of dark circumstances (when pills tainted with Cyanide lead to several deaths of Tylenol users).
Enter Netflix, who faces a comparably life-threatening disaster (to their brand, not consumers' lives) to that faced by Perrier and Tylenol some time back, prompting the obvious question. Is the Netflix story destined to play out like Perrier or Tylenol?
But first, two disclaimers. One, I am a very happy current Netflix streaming customer and a former Netflix DVD customer, having quit the latter when the pricing model changed (I did not see enough value to continue, given my family's usage patterns).
My happiness with streaming stems from the fact that Netflix's streaming catalog is sufficiently wide and deep (although obviously not to the level of the DVD offering), and the service is sufficiently rich and enjoyable that my entire family accesses its programming on a near-daily basis.
As such, Netflix streaming has earned a spot in my living room, and in fact, is the primary usage anchor to my Apple TV.
I state this upfront, as I know many who don't see the streaming programming in a similar wide/deep/good enough light. Your mileage may vary.
The second disclaimer is that when I first trialed the Netflix hybrid service a few months back (yes, I ignored Netflix marketing for YEARS), I contacted DIRECTV, my satellite service, to tell them that I was canceling my Starz pack.
“Why?” Asked the DIRECTV support person. When I told them that I was allocating those dollars to Netflix, I promptly got a significant discount not to cancel Starz, which tells you all that you need to know about how DIRECTV views Netflix competitively.
These two data points provide some context for understanding Reed Hasting’s most recent shareholder letter, where he adroitly positions Netflix streaming as in the 'HBO bucket' (@ $8/month vs. HBO @ $12/month), as Peter Kafka notes in this extended excerpt Hasting's letter in Kafka's excellent ‘Comeback Plan’ piece. Says Hasting:
In television… the networks (ABC, FX, etc.) have long relied upon exclusive content to differentiate among themselves. As video moves online, so too has this practice of exclusive content. HBO has an exclusive license to recent Universal movies that includes its online HBO GO, for example. Netflix has signed exclusive licenses for DreamWorks Animation, for Relativity, and others. In episodic television, exclusives are also the norm. Netflix doesn’t license “Deadwood” from HBO because they see strategic value in keeping it exclusive. Netflix licenses “Mad Men” and “House of Cards” exclusively for much the same reason.
…We don’t have to “beat” Starz or other networks to succeed…We won’t have every movie or TV series; but we do provide enough value that consumers also want to subscribe to Netflix.
Any given consumer will have only one of DirecTV or Comcast, say, for their video service. That is classic either‐or competition. But with premium television networks like Netflix, the more good experiences there are, the more consumers are willing to spend to have multiple channels from which to get enjoyment.
Netflix Faces an Interesting Quandary
But, pursuing such an opportunity is not without peril.
On the one hand, Netflix is well-positioned to go after the HBO ‘premium channel’ bucket. Their long-tail catalog is relatively cheap and deep (in contrast to movie blockbuster programming), and they seem to have a good process in place for locking down that content.
In the big picture, it makes Netflix streaming better value and more enjoyable than HBO, save for HBO's hit series and new movie releases (which is 70-80% of my viewing time on HBO).
At the same time, it seems very plausible that Netflix can "sprinkle in" enough 'must see' programming to secure a major foothold in this market.
If they can, then being on-demand, having wide distribution and delivering the composite viewing experience that Netflix offers (in tandem with the aforementioned) is a compelling value proposition for their rapidly growing 20M+ base of subscribers.
The quandary, however, is that streaming is diametrically opposed to DVD (and vice-versa), not only in terms of business model, but customer base as well.
It's the proverbial fork in the road, which is why they wanted to get rid of DVD in the first place. However, in being so ready to kick their loyal DVD customer base to second-tier status, they essentially dumped their long-term spouse to run off with the 'hot blonde,' which is tantamount to betrayal.
Is it any wonder that their brand image, stock and subscriber base has taken such a serious hit?
Now, I have a theory as to why they would act so dispassionately (economics aside), but more on that in a moment.
Either way, streaming is now the dog, and DVD is now the tail, and there is no use in pretending that it is otherwise. You can't fully put humpty-dumpty back together again.
For the DVD user, this is a perfect opportunity to see if the grass is greener elsewhere, and if it's not, take some solace that Netflix had their come to Jesus moment, and is re-committing to you. Forgive, but don't forget.
For the non-DVD Netflix user, other than the WTF aspect of how poorly orchestrated this was and the corresponding questions it raises about Netflix's once-pristine stewardship, it's mostly a non-event.
For investors, however, it's a value reset (as Felix Salmon notes at Reuters), for which there are no easy answers, save for time. The stock is down 75% since mid-year, and could go up, down, or sideways. It's anyone's guess. What is HBO worth, anyway?
In a perfect world, Netflix would operate the DVD service going forward (so as to maintain their brand equity), but someone else would own the business, maybe private equity.
What about Warren Buffett? He likes great brands. What about the DVD device makers, who need to extend the useful life of DVDs?
Pursuing such a move would be Amazon-like in terms of knowing your core business, but being platform-minded and thinking outside the box in terms of growing and mainting the mindshare of your constituency.
Until they reconcile this intellectually, I suspect their body language is going to be akin to the unhappy couple that stays married for the benefit of the kids. Everyone's unhappy, including the kids.
A Brand Collision with Corporate Culture
I read a particularly harsh take on Netflix’s corporate culture called ‘Netflix: Terror at the Top?’
It argues that Netflix has a fear-based management culture where people are pretty readily discarded if they don’t live up to expectations.
There's good and bad in this. Great companies demand peak performance from their personnel, regardless of whether it’s someone operating at customer-facing, production, business development, marketing or management levels.
'A' players hire 'A' players. 'B's' hire 'C's,' and so on. While there's nothing warm and fuzzy about this, the fact remains that it often leads to better products and solutions.
But, one gets the sense that Netflix is dogmatic about this to the point that people are pushed out if/when they disappoint, and sooner or later, everyone disappoints, which creates a bit of schizophrenia, even if it has (clearly) served Netflix well -- prior to the current cluster-f-ck.
In this context, one can see how pragmatic, intellectually-focused Reed Hastings sees one business materially contracting, and another showing substantial growth. He sees fundamentally different customer bases (color me dubious on this assertion of his) and different economics + licensing rights.
Were he a cynic, he could simply milk the business AOL-style, and keep his mouth shut. But, then how to position a service where the DVD narrative confuses the messaging, positioning and business approach of Streaming, especially when heretofore, the conventional wisdom was that Streaming was something free bundled on DVD?
Thus, the Qwikster moniker could be looked at one of two ways. As a company intentionally tarring their old business, so as to better segment their new business.
Or, as a realization that as 'NOT Netflix,' the footprint of jobs that the service could target might change. They have already talked about games, but why not incorporate game consoles and Blue-Ray players, for example?
Either way, they now have a profitable, variable cost business with no uptick in subscriber acquisition cost to maintain.
It’s like saying, “DVD you can come if you want, but streaming is who we're courting.” Hastings basically compares DVD to the aforementioned AOL dialup business in ther earnings call.
Envisioning a Native Controller Client
Here's where's the company can start turning the page. Namely, by showing how, as a native IP streaming service, Netflix has the potential to create new extensions to its core offering that make it more:
The above Netflix Controller client that I've mocked up shows how such an experience might come together.
On the social front, the client makes it easy to broadcast what you are watching now to friends, including one-click access to that current scene/sequence that you are watching now for synchronized viewing, something that can't be readily done with DVDs.
A structured chat interface makes it easy to communicate in a way that is synchronous, shared and contextually linked to the specific content being watched, which opens to door to all sorts of news ways to both discover content and connect with like minds in real-time.
The ability to tie favorite scenes, movie trailers and favorite reviews together into a sort of IMDB on steroids type of listing is the third leg that makes this type of experience fresh and alive.
It hearkens back to a classic old Logitech ad introducing the wireless mouse where they contrast wired vs. wireless by showing a baby wearing a diaper (as the wired proxy), with the label 'Good' above the picture.
Adjacent to it, is the label 'Better,' with a diaper-less, giddy baby peeing a stream in the air. The message being that wireless is liberating.
Netting it out: Netflix needs to play a bit of three-dimensional chess so that its legacy DVD customers, who made the brand what it is, don't irreversibly pollute it, as many are emotionally prepared to do.
In parallel, it needs to spend some with its investor base articulating why Netflix's updated vision is a greater outcome than simply milking legacy (including better articulation of the likely 'honest outcome' for DVD).
And it needs to get back on offense by showcasing what a native IP streaming service can do that neither a legacy DVD biz nor a premium cable/satellite channel can touch.
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