Call me a contrarian, but I say Netflix is on the right track

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As you’ve probably noticed, movie and TV fans are up in arms over Netflix’s steep recent price hike as well as its decision to spin off its DVD rental-by-mail service, creating a new business operating under the (already much-ridiculed) name of Qwikster. Customers are ticked off with the new price structure --announced two months ago -- which could add as much as 60% to the monthly bill of people who watch both DVDs and streaming video.

Netflix chief Reed Hastings is in such hot water that he’s had to put up a blog post (and a YouTube video) apologizing for the way the announcement was handled. As my colleague Ben Fritz notes in a front-page story in Tuesday’s paper, Hasting’s remarks resulted in 17,000 comments, the vast majority of them distinctly negative.

So is this a disaster for Netflix, as most of the media coverage in the past couple of days has implied? (The headline to the story in our print edition was: ‘Once High-Flying Netflix Is Sinking.’) Call me a contrarian, but I don’t think so.

There’s no doubt that Netflix made a PR blunder in the way it handled the announcements, not to mention the way it abruptly announced such a steep price hike for its product. It was obvious Netflix would have to raise prices, largely because its studio suppliers are squeezing the company. With Netflix’s relatively inexpensive access to streaming video of films and TV shows, studios are worried that the company might get so big -- it’s already at an impressive 23 million subscribers -- that it could have an Apple-like stranglehold on the streaming marketplace.

But I think Hastings, in his clumsy way, is being a savvy long-term strategist. Although most media accounts focused on the part of his statement where he admitted to an arrogance and ‘lack of respect and humility in the way we announced the separation of DVD and streaming,’ nearly everyone ignored the most revealing portion of his statement. Hastings said:

My greatest fear at Netflix has been that we wouldn’t make the leap from success in DVDs to success in streaming. Most companies that are great at something -– like AOL dialup or Borders bookstores –- do not become great at new things people want (streaming for us) because they are afraid to hurt their initial business. Eventually these companies realize their error of not focusing enough on the new thing, and then the company fights desperately and hopelessly to recover. Companies rarely die from moving too fast, and they frequently die from moving too slowly.

Hastings is absolutely right. There are thousands of examples besides AOL dialup and Borders books that illustrate his point. You could start with the entire record business, which refused to give up its super-profitable CDs and embrace downloading until it was too late--and until Steve Jobs had cornered the distribution market with iTunes. Ditto for Schwinn, which lost the mountain bike business to Trek; for Bayer, which foundered after customers switched to Tylenol; for Kodak, which initially refused to embrace digital photography, fearing it would lose its profitable film trade.

The list, which of course should also include a host of disastrous techno-phobic decisions in my own newspaper business, is endless. Hastings has given Netflix a long-term lease on life by anchoring its business in the future. DVDs are slowly going away as a business, so Hastings has created a separate company that, when it fails, as all DVD-related enterprises eventually will, won’t bring down the core business. In fact, he’s shrewdly transferred the valuable Netflix brand to the streaming part of the business, which is where all the growth potential lies.

His clumsy handling of the switch resulted in a host of lost subscribers, but they were overwhelmingly people (like myself) who are giving up the DVD rental part of the service, the business that is going away anyway.

Hastings hasn’t been talking to the media, but if I could get him on the phone, I’d be asking him if he’s been reading Al Ries, the marketing strategist who has written a number of far-sighted books, perhaps the most influential being ‘Focus: The Future of Your Company Depends on It.’ In it, Ries offers savvy advice about how companies should cope with change, especially the wrenching change caused by disruptive new technology.

Ries says the worst strategy, after refusing to change at all, is trying to keep your feet in both camps, desperately hanging on to your old business while simultaneously starting a new one. As Ries describes it, trying to do both is like trying to jump a wide ditch but insisting on keeping one foot on the near bank. You’ll never get across. If you’re a company that is the first to exploit a next-generation product, as Netflix has been with streaming, Ries argues that ‘the time to exert maximum pressure is early in the game.’

That’s what Netflix is doing. They are putting their eggs in the streaming basket, believing that streaming is where most consumers are headed. They’ve managed to break a few eggs along the way, but Netflix is continuing to strengthen its position as the leading brand in its business. When you’re dealing with new technology, you can’t go wrong embracing the future.

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Once high-flying Netflix is now stumbling

--Patrick Goldstein