Netflix, The Sequel: From Customer Revolt To Emmy Breakthrough

Netflix, The Sequel: From Customer Revolt To Emmy Breakthrough

Netflix is the toast of the town, and they rightly deserve to be congratulated not only for bringing joy to their nearly 30 million subscribers, but for impressing stalwarts from both the Street and the Valley.

When they first launched in 1997 – pre-Google! – the company innovated a video-rental business model based on “no late fees.” While Amazon had been practicing e-commerce since 1994, Netflix set itself up as a competitor to thousands of mom-and-pop video stores, as well as big box chains like Blockbuster.  The company also faced a heavy lift in their efforts to shift consumer behavior away from in-store rental to DVD by mail, and then again to online streaming.

Yet in recent years, Netflix first failed to grasp — and only later learned to love — the implications of its networked reality. In a world that had rapidly gone from connected, to interconnected, to  interdependent, the company missed its opportunity to engage with the very forces from which it had so handsomely profited. Its near death experience – and the HOW of its recovery – make the Netflix tale profoundly relevant not just to media junkies, but to any engaged individual, organization, or government.

Over time, Netflix came to realize that what makes them unique is neither their distribution platform, nor – contrary to conventional wisdom – their product offerings. While House of Cards is exclusive content, albeit Emmy-nominated, we are swimming in an ocean of original programming. What’s key to Netflix’s performance is their relationship to their customers.

And, as is so often the case, Netflix had to stumble before it could walk.

When Netflix decided to raise its prices and announced it would split its company in two, 800,000 subscribers voted with their feet and left the service practically overnight. I had never seen such a mass exodus of consumers in such a short period of time.  For me, it was a turning point revealing the increased the power of the individual.

I found myself sharing that experience and similar examples – Bank of America and Verizon had also lost droves of customers due to taking customers for granted – in conversations with friends, colleagues, and eventually with global audiences, onstage and in print (including in Forbes here and here).

Something about the Netflix example resonated strongest among readers and audiences. People leaned forward in their seats when they heard me reference  the price increase. They started talking about “Netflix moments” to describe this power shift to the individual, using it to assay everything from the Russian people contesting Putin’s claim to absolute power to consumers who took to social media to lambast corporate decisions on pricing or supply-chain sourcing or executive compensation.

Ironically, before Netflix unilaterally announced that it was cleaving its company in two and expecting its loyal customers to buck up under the price hike, it had circulated a PowerPoint deck that proclaimed the importance of a culture that encourages employees to “listen well, instead of reacting fast.” What this kerfuffle highlighted was that such a declaration was necessary but not sufficient. The company still had to do the work of building authentic relationships with its customers.

After all, the breach certainly wasn’t due to the “what’s” of the decision. The price increase wasn’t outrageous. And the reasoning underpinning the decision–Netflix came to the decision as part of a brilliant strategy to move into the streaming video business – a move that was extremely, even presciently, sound. The company was way ahead of its competitors in seeing that the future of video resided in streaming. What drove those customers away had everything to do with HOW it behaved – specifically, how abruptly the company made a business decision that profoundly affected its subscribers and how they perceived that “one-way conversation” as the true offense.

The company’s hit extended far beyond subscriber loss: The day after Netflix made its subscriber loss public, the stock cratered, dropping 37% – the single biggest intraday stock decline since 2004. Netflix had dug itself a deep hole.

The company started clawing its way back with a video in which CEO Reed Hastings acknowledged the tone-deaf nature of the decision in an abject apology to customers: “I messed up,” Hastings wrote. “I owe everyone an explanation. It is clear from the feedback over the past two months that many members felt we lacked respect and humility in the way we announced the separation of DVD and streaming, and the price changes… In hindsight, I slid into arrogance based upon past success.”

This nuanced mea culpa reflected how power has shifted in the 21st Century. Customers, just like citizens, expect “two-way conversations.” Just think of the revolts that autocratic leaders have incited in Egypt or that a bus price increase triggered in Brazil. When leaders do not honor the emergent expectation of interactive discourse – to exert power throughtheir stakeholders, rather than wielding it over them – customers and citizens today have power, at their fingertips, to unite. That’s one reason why business audiences respond strongly when I hold up Netflix’s price change as an example: so many of them had the exact same experience – or realized their exposure. That’s why shedding “only” 800,000 customers as the result of a one-way conversation almost seems quaint today: I recently wrote about Zynga – the online gaming company – and how they lost nearly 38 million users by not getting its own HOWs right.

Netflix stayed on my radar. It became my go-to example of how businesses cannot afford to operate in our newly transparent, interconnected and interdependent world. And, as I continued to speak about the company, I recognized that with each invocation, I was obligated to track its progress. Otherwise, I would myself be guilty of using the company simply to make a point.

Netflix began to rebound, and journalists and analysts both began to write about it as a success story. From my perspective, however, what is important is that the success is an outgrowth of its work on culture. Like more than 4.7 million others, I’ve clicked through Netflix’s culture slides. The deck, created nearly four years ago, lays out nine behaviors and skills – judgment, communication, impact, curiosity, innovation, courage, passion, honesty and selflessness – that are valued at the company.  The 128-page slide presentation said many of the right things, but that didn’t mean it would translate to behavior. I wanted to keep track of the company’s actions.

And I don’t just mean standard measures of success. Yes, I’m impressed that Netflix has added more than 3 million video-streaming members in the first quarter of this year alone. It has eclipsed HBO,  with a total streaming subscriber base of roughly 28 million. Others have pointed out that the company has posted the best performance among Standard & Poor’s 500 companies so far this year, and its second quarter revenue topped $1 billion for only the second time in company history. But as I watch the company, I’m much more interested in the deeper drivers of these business outcomes, the ones that enable Netflix to thrive in a connected, interdependent world.

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