The Year Netflix Almost Died
Earlier this past summer, Netflix CEO Reed Hastings put on a goofy sweater and announced that he added 30 percent more subscribers last quarter than he was expecting, putting his total user base at 65 million. After a seven-to-one split, his stock is on fire. Netflix will be in 200 countries by the end of the year. The company also just announced it received 34 Emmy nominations for Netflix originals.
What an amazing comeback from 2011 -- the year Netflix almost killed itself. That year, the company lost 800,000 customers, its stock price tanked almost eighty percent, and their management team got turned into a Saturday Night Live sketch (remember Qwikster?).
In an effort to steer his customers away from mailed DVDs and toward streaming media plans, Hastings split up his $10 all-in-one package into two $8-plans, effectively dropping a 60 percent price increase on his customer base in the midst of a massive recession. The results were ugly and self-inflicted.
Essentially, Netflix lost its way. Netflix had built a substantial business built on subscriptions. But Netflix violated the number-one rule of subscription businesses: It’s all about the relationship. Relationships are a two-way street. And when Netflix made a unilateral decision to change the relationship, without consulting the other side, it got burned badly. Arbitrarily jack-up prices and force your customers to accept a new you-are-a-DVD-watching-loser brand? They violated the trust, and subscribers headed for the doors.
So how did Netflix turn it around?
They started listening.
First, their customers wanted access anytime, anywhere. Netflix realized early on that broader consumption patterns were changing dramatically. Four years ago, not many people had heard of Spotify, which was a three year-old Swedish startup at the time. Today subscription-based streaming plans are rapidly becoming our preferred means of consuming media, whether it’s CrunchyRoll for Japanese anime or Rogers GameCentre for Canadian hockey.
Today, any major content provider that hasn’t announced an over-the-top streaming service most definitely has one in the works. The Subscription Economy has arrived. Hastings was incredibly prescient, of course, to push streaming as the future (he called it Netflix for a reason). Netflix picked up on this early -- but Comcast did not.
Secondly, their customers wanted simplicity, so they created a seamless user interface that’s personalized and informed by million of plays a day, including when you pause, rewind and fast forward, as well as four million user ratings, three million searches, geolocation data, viewing times, device information and social media feedback. The list goes on.
Finally, customers wanted great original programming, and as a result of all this proprietary customer insight, Netflix had an edge if it could be relentlessly data-driven in developing new shows. A little-known British show called House of Cards has done notably well with their viewers, and Netflix knew that David Fincher, Kevin Spacey and Robin Wright were all very popular with Netflix audience. The Venn diagram was complete.
Jonathan Friedland, the company’s chief communications officer, told the New York Times that “because we have a direct relationship with consumers, we know what people like to watch, and that helps us understand how big the interest is going to be for a given show. It gave us some confidence that we could find an audience for a show like House of Cards."
Today, everyone recognizes Netflix as a remarkable business innovator. Not to dispute that, but I think the real story is much simpler. In 2011, Netflix almost killed itself because it forgot about customers. It forgot that relationships are two-sided. But that was the wake-up call they needed. And that's the secret of their success today.
Four years ago, Netflix had 24 million static customer accounts. Today it has 66 million individual customer relationships. And it’s listening to each and every one of them.
Tien Tzuo, widely recognized as one of the thought leaders in the software-as-a-service industry, founded Zuora in 2007 after serving as Chief Strategy Officer at salesforce.com. As Zuora's CEO, Tzuo has not only built one of the fastest growing SaaS companies, he's also evangelized the shift to subscription based business models and the complex billing structures they inherit, coining the phrase Subscription Economy.