Are You Willing To Kill Your Company To Save It? Lessons From Reed Hastings And Netflix.

Four years ago I attended the Web 2.0 Summit in San Francisco. This was 2007 and the Web 2.0 Summit hadn’t quite yet reached the critical mass that it would even a year later. If memory serves me right, it was a relatively intimate affair and there was lots of great networking and some great speakers presenting to full but not very big rooms. The most memorable thing that happened at the summit (for me at least) was during lunch on the first day. I had just sat in a session on mobile (one of the main reasons I went) from a Nokia executive talking about how important the mobile device was and the future of mobile. It was a really good session.

I didn’t know anyone at the conference and had just sat down at a table when a guy came up and asked if he could sit in the last open seat at the table. After a moment of no one really talking, this guy asked everyone what their favorite sessions were and what they found most interesting. This spurred a lot of conversation and I eventually introduced myself. He said his name was Reed. I asked who he worked for and he said Netflix. I asked if he had worked there for very long and he said that he had worked there from the beginning. I thought that was cool and asked what he did, he said he was the CEO. Then it dawned on me, “Oh, that Reed, as in Reed Hastings.” Yeah, that guy.

I was really impressed by this because Reed wasn’t looking to impress anyone, he didn’t have a handler, he wasn’t even speaking at the summit, he was most interested in what we found interesting. He was there to learn first hand. I don’t know many CEOs of well established, publicly traded companies that would have done that.

I have always been a big fan of Netflix and an even bigger fan of Reed Hastings.

A few months ago Netflix announced a major change in their pricing structure. They were going to be charging separately for DVD rentals and their popular streaming  service. This changed resulted in a huge backlash and has even effected its stock price. Last night Reed posted to the Netflix blog trying to explain the decision and apologise for the angst that their customers have felt. He also added some explanations for why they made the changes. But the biggest news in the post was that they are splitting off the DVD rental portion of their business as a separate company. This is huge.

Reed’s post is good, especially from a communications stand point, but I wanted to call attention to a few points in particular.

For the past five years, 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.

I love this paragraph. To me it highlights exactly what a CEO should be doing – focusing on the strategy and losing sleep that they aren’t keeping up with the market. I especially love the last line. He goes on:

When Netflix is evolving rapidly, however, I need to be extra-communicative. This is the key thing I got wrong.

In hindsight, I slid into arrogance based upon past success. We have done very well for a long time by steadily improving our service, without doing much CEO communication. Inside Netflix I say, “Actions speak louder than words,” and we should just keep improving our service.

But now I see that given the huge changes we have been recently making, I should have personally given a full justification to our members of why we are separating DVD and streaming, and charging for both. It wouldn’t have changed the price increase, but it would have been the right thing to do.

Communication is so critical. I agree 100% that actions speak louder than words, but this exactly highlights the point that you need both. It amazes me how many people discount words or err on the other side and think that words can be a proxy for action. You need words and action. I also love that Reed is not apologizing for the strategy. In fact they are doubling down on the strategy. This takes courage and conviction:

So we realized that streaming and DVD by mail are becoming two quite different businesses, with very different cost structures, different benefits that need to be marketed differently, and we need to let each grow and operate independently. It’s hard for me to write this after over 10 years of mailing DVDs with pride, but we think it is necessary and best: In a few weeks, we will rename our DVD by mail service to “Qwikster”.

Now, I don’t know if this strategy will work (it’s going to be interesting to watch though). I believe it will because I think that Reed and his team know a lot about the data and their customers that they don’t mention. They know which way the market is going and they’re preparing for a long-term strategy. I love that.

It’s a big bet. The willingness to cannibalize your main business is not one that many CEOs make. But I’ve already seen first hand that Reed is not your average CEO.

[Update] Go read @msuster’s post: Why Reed Hastings Should be Applauded for Netflix Split, I think it’s the best analysis so far.

About Tac Anderson

Social media anthropologist. Communications strategist. Business model junkie. Chief blogger here at New Comm Biz.
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  • http://twitter.com/timleffel Tim Leffel

    The problem is, the new version of the business (streaming) is not nearly as good as the old version (DVDs). Poor selection–and about to get worse—plus far inferior picture quality even on my Verizon FiOS connection. For that I’m supposed to pay more? Apparently 1 million customers agree and have bailed out. 

  • http://www.newcommbiz.com/ tacanderson

    Reed said that companies rarely die from moving to fast, he didn’t say it’s impossible. I think in the long run this will pay off. I think it’s a matter of suffer now for long term growth or milk what you got and suffer from innovators dilemma. Neither is an easy choice, only time will tell.  

  • http://twitter.com/timleffel Tim Leffel

    We’ll see. But people are far more willing to put up with inferior audio (radio, iTunes) for the sake of convenience than they are to put up with inferior video. Audio has stepped back on the move, but video keeps stepping up at home. Blu-ray streaming (or even DVD quality streaming) can’t happen because of bandwidth. He doesn’t control the pipes. 

  • http://www.newcommbiz.com/ tacanderson

    Sounds like the key to the two separate business models. Convenience vs. Quality. Before moving to the UK this year I was a customer of both and used the streaming service for more often than the mail order. A considerable portion was done on my mobile devices. But I’m not a videophile.  

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