One of the great “no net” pivots in tech history was the gutsy decision by Netflix CEO Reed Hastings to sunset the company’s basic DVD-by-mail business, which accounted for virtually all its revenue at the time. Hastings basically bet the farm on the digital delivery of movies, which ultimately led to the creation of the premiere video streaming service– along with many copycat competitors– which we all take for granted today.
This critical shift changed the trajectory of the company. Importantly, the DVD service continued, and contributed substantially and critically to Netflix’s profits in those transition years when the streaming service couldn’t pay its own way. You always want to make sure you see the next log to land on as you skip merrily across the raging river. There’s a lot to be said for slow and steady change, especially in any B2C marketplace where you’re introducing new services, new technologies, and expecting significant consumer behavior changes.
This is a lesson, given its current and serious woes, that Netflix’s leadership team needs to keep in mind just as much today as in the past. Ultimately, Netflix’s hundreds of millions of streaming video subscribers turned the company into the industry’s 800-pound gorilla. There were certainly a few missteps along the way, such as the 2011 Quickster debacle, but the path forward was remarkably stable and exponential–at least until this year. Even the entry of multiple, large-scale, and well-funded competitors didn’t seem to slow Netflix’s growth or forward progress.
But now, the combined impact of all of those other like offerings along with Netflix’s regularly recurring price hikes, the slowly reopening post-pandemic world, and international subscriber losses due to the war in the Ukraine, has come home to roost with a vengeance. Since January, with the early warnings of first-ever subscriber count decreases, the dry forecasts suggest accelerating future departures. Likewise, the most recent earnings reports have banned much of the storied legend, leadership, and legacy of Netflix. The company’s market cap has shrunk by more $170 billion, and its stock price has fallen from a high of $700 a share to around $180.
Looking to what looks like an existential challenge will be the biggest obstacle its longtime management has ever faced (never mind its size, resources and history) and a test as well of its vaunted culture and business practices. Time is short and an effective response will need to quickly address both the macro issue of the market’s fears about the changed and far more competitive streaming environment and the micro issue of how to fill the revenue holes the ongoing losses of millions of subscribers will create . As UCLA’s legendary basketball coach John Wooden used to say: “Be quick, but don’t rush.”
By Netflix’s own admission, the company will lose about two million more subscribers in the next quarter alone. Safe to say, these folks won’t be coming back any time soon and certainly not at the subscription price points they previously represented. Long story short: given the stock market’s complete fixation with numbers, there’s little relief in sight on the macro front. The shadow over streaming’s future will continue to spread for some considerable time, and the implosion of CNN+ couldn’t have come at a worse time for the industry.
So, the main challenge for NFLX management seems to be the in-house micro issue of how to replace tens of millions of dollars in lost revenue with alternative revenue streams. And how to do that as soon as possible without jumping from the frying pan into the fire by moving too quickly. If existing subscribers aren’t going to grow and departed subscribers aren’t coming back, the only two paths forward are adding new subscribers from a diminishing and costly pool or increasing the monthly spend of each of the remaining subscribers.
It’s no surprise that Hastings– much to the chagrin of almost his entire team — immediately suggested adding an ad-supported version of its basic service to the mix to attract new “ad subsidized” members, even though this concept has always been treated As sacrilege by the company and the very last thing current Netflix members would accept, since it completely upgrades the traditional NFLX experience. In truth, this traumatic and hasty suggestion reeks more of desperation and knee-jerk reaction than any kind of rational solution. This looks more like turning a offering carefully differentiated and premier service into just another “me too” and sacrificing years of brand equity and goodwill in the process.
The far more interesting suggestion, and one that’s been long overdue, is the need to recoup the millions in forfeited monthly subscription revenues that Netflix has almost won since inception by permitting subscribers to share their NFLX passwords with friends and family on an unlimited basis. This was a deal with the devil from Day One, which was always going to become an issue as the dollars involved continued to grow. But management apparently concluded that the favorable word of mouth and the growth in “users” — as opposed to paying members — was worth the hidden costs.
A side concern is whether, because the company knew that millions of consumers were fraudulently using its service, there were disclosures and other accounting issues that were ignored or concealed. Of course, we continue to live in a time where situational ethics too often dictate behavior and there’s no reason to expect an end any time soon. Amazon knows it has millions of counterfeit vendors who are killing small retailers by ripping off their products and selling cheap, defective copies all day long, but won’t take the necessary steps to shut these crooks down. Way back when, Snapchat’s founders knew that her photos weren’t really ephemeral but didn’t bother to tell its users or the public. And, of course, the persistent lies and continual frauds which let Theranos survive far longer than it should have been just the most recent examples.
Netflix’s management’s multi-year acquiescence in the theft of its own services for whatever reasons and its refusal to take any actions to acknowledge or eliminate the leakage aren’t much better than the old revenue-pumping scams of Crazy Eddie Antar. At least, in a somewhat perverse reckoning, they will now belatedly have to address the problem. It will be interesting to see how Netflix attempts to explain its way out of the massive financial and ethical hole which it has dug for itself. Blaming the longtime beneficiaries of his knowing, but sleazy and shortsighted, generosity won’t fly. I’m sure the company’s board is simply praying that the whole problem somehow disappears, but unfortunately you can’t pray a lie.