From the Crowd

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Rating Netflix's recent actions

October 11, 2011: 1:29 PM ET

By Mark Suster, contributor

A month ago I applauded Reed Hasting's bold decision to split his business into two components. Now he's reversed course.

Netflix (NFLX) as a service has always prided itself on movie recommendations that are tailored specifically to you plus user ratings on the quality of films. So let me use their ratings system to judge their actions to date:

The big price increase: 5 out of 5 stars. The remainder of this post will deal with this decision but it comes down to the different economics of DVD rentals due to "the first sale doctrine" which gives Netflix a complete library of films and the fact that the first-sale doctrine doesn't apply to digital downloads. This makes their business types very different. Some customer segments value the DVD business and these may be more price sensitive. Some customer segments value the convenience of instantly available films. They might be willing to pay higher prices (and perhaps not an "all you can eat" price but a "pay as you go" price per film). They are potentially different business models. Netflix needs to segment their customers and charge each what is appropriate.

The decision to split the businesses: 3 out of 5 stars. I really like the clarity of two business units – whatever you name them. Each with its own head, its own financial reporting and its own content strategy, pricing strategy and marketing strategy. Did they need to be separate legal entities? No, probably not. But creating better visibility for investors of the profitability of each unit and accountability for bosses of each to perform well according to differnet metrics is a good and important idea. Perhaps they should have just created business units called: Netflix DVD & Netflix Streaming. Or take a play out of Coca Cola and called them Netflix Classic & Netflix Digital (note: in the future they may want to have downloads and not just streaming so I like "digital" more than "streaming.")

The handling of the announcement to split the businesses: 1 out of 5 stars. Netflix announced the changes to its company via a blog post. A blog post! While I loved the sentiment of what was written, the lack of the human touch made it DOA. Netflix needs to borrow the marketing prowess of Salesforce.com. You need to plan big announcements. You need some showmanship. You need to invite the press, talk to them, let them ask questions. You don't handle major announcements via a blog post and no touch points. Of course the press is going to roast you. Duh. They don't understand the complexities of your business. They need to grill you with questions and look in your eyes as you respond. We need video reel to show customers that you care. Not a freakin' blog post. So how will consumers react? Basically their reaction is heavily correlated with the press coverage of your rollout. Here's a brilliant post that they *might have* written but didn't.

The name Qwikster: 1 out of 5 stars. I was asked by a NYT journalist if I thought it was a clever name since it was perhaps intentionally retro. I responded, "no, it's not clever. They thought about it for 5 minutes. Probably the 5 minutes before they wrote their blog post. What is my evidence? They didn't even bother to get the Twitter handle for it.

The decision to have two IT systems for Netflix & Qwikster: 1 out of 5 stars. One of the biggest things that came up in the comments to my original post was how disappointed people were in having to have two separate IT systems for Netflix & Qwikster. Two separate rating systems, two separate queues, etc. Yeah, I thought that was pretty dumb, too. Again, I think nobody had really given much thought to what customers would want in the rollout. I stated in the comments that I felt that even with separate legal entities they could have had APIs between the IT systems that allowed for reviews, queues, billing info, etc. to be synchronized. This is the main reason the tech elite roasted them. Dumb, da-dumb, dumb, dumb.

The decision to back-out of the splitting of the business: 3 out of 5. Given how badly the announcement of the splitting went and their inability to control the PR cycle (or their stock price!) I guess it's not the end of the world to unwind their decision. Right? Well at least this time they'll handle the announcement of the change more carefully. Or …

The announcement of the decision to back-out of the business: 0 out of 5. JFC. Really? Major change by blog post again? How'd that work out for you last time?

Fan Summary of Netflix Redux, the movie: 2 out of 5. Netflix is a great business. I use it all the time. I'm a 99% streaming guy so I do want a bigger library. There are some films I find on iTunes or NVOD that aren't on Netflix. I pay for them separately. I'm in the convenience "I want it NOW!" customer segment. But they sure need somebody at the top handling their marketing and PR better. Maybe the person that runs this is tremendously talented and Reed Hastings is setting the agenda. Or maybe they need to hire somebody with more gravitas / experience. But if I were on the board that's what I'd be complaining about more than the changes to the business, the separation of business units, the loss of some customers, etc. Because poorly run marketing can negatively affect a company. And it ain't rocket science.

Mark Suster joined GRP Partners in 2007 as a general partner after selling his company to Salesforce.com. He focuses on early-stage technology companies. He blogs at Bothsidesofthetable.com. This post originally appeared on TechCrunch.

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