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What is Happening To Netflix Is Unfair

Here’s the deal. Companies are around to profit maximize – a corporate form of self-interest. For many years, this was the organizing principle of all commercial enterprises. The rules, and rewards seemed fairly clear. Not many people argued with it as a system that worked.

Then came the social era we live in. More than any particular technology, or marketing concept, or even philosophies like transparency, the social era came to represent a different set of assumptions and cultural norms. The all-out profit maximizers started to be seen as selfish rather than serving.

Now Netflix never really tried to be “Social”. While they may have done customer feedback forms, or enabled peer recommendations, they generally operated by the more traditional commercial rules. Unlike companies like Pepsi or others who have tried to get consumers to “like” them or “fan” them, Netflix really hasn’t tried to do that — they generally just delivered a good product with a fair price. Any social stuff they did was just a patch on the core more traditional business model.

It was us, the consumers, that changed our expectations. We saw that little red envelope and got excited. Red says love, red says passion, red says good things are about to happen. We thought of Netflix as an entertainment company that delivered fun to our house. We liked that. We associated it with cuddle time with the family all piled on the couch while watching a video. And so we liked the company that brought us this, Netflix. Some people would probably have even said they loved them. And this not so much what Netflix did or didn’t do, it’s what consumers did. Netflix actually didn’t say that they cared about its consumers, or even that it cares about the passionate experience of home entertainment. Their messaging for many years now has been based around “you, the customer”, they “the company” created a transactional exchange. And that’s very much what the old corporate rules were – “You’re my customer, I set the terms” was a commonly accepted principle. But the weird about culture is that it can shift without you noticing. I’m thinking this is why Netflix is reeling and having trouble finding its footing for what to do next.

The social era comes with a new expectation and demand from participants who see themselves as co-creators with companies. Netflix was still operating under one construct but its customers had a more social business model mindset. Social and commercial represent two different economies as my friend Andrew Blau said to me yesterday. HuffingtonPost was highly beloved when it was operating under social rules to create content together but then criticized when the owners were able to commercialize what they had built using social construct.

In the social era, the social object that unites people isn’t a company or a product; the social object that most unites people is a shared value or purpose or interest. And, it turns out that the originating company doesn’t have to deliberately play in this construct; it can just happen to them.

So there is Netflix, surfing on the wave of being a beloved company with millions of customers (many of whom were fans) and they thought they could maintain the loyalty of their customers without warning them ahead of time or consulting them with options. Then after a non-apology apology, Netflix experienced a 2% higher churn rate than last quarter to represent a drop of 6.3% in subscribers, and then came an immediate stock dip.  This story has been unfolding since July and Netflix has not yet rebounded. The consumers who loved Netflix for representing entertainment and fun and passion were hurt when they found out that Reed Hastings cares more about operational efficiency, managing for the innovators’ dilemma, and keeping “his” business alive. The message received was that it was all about Reed and Netflix and not at all about the commons.  Under the old rules of commercial business, this would have worked. Today, in the social era construct, it doesn’t seem enough.

Hastings and Netflix will continue forward. I have no doubt about that. They are managing for disruptions in the value chain of their business. But they are fundamentally missing out on how the culture around them has changed, and the implied new expectation as a consumer-facing company.

But this IS a lesson for all organizations now operating in the social era. Most of the time, social “stuff” is billed by the advisors as a positive ra-ra goodness of creating trust and developing brand affinity. But the social era has a definite new constraint. The Netflix example shows that a company need not even be seeking to be “social” in a big way to have this constraint applied. The new consumer expectation is that company and consumer share something, and that we are making something together that both of us co-create and co-own. Values, Purpose, Shared Goal, Porter’s Shared Value – we could talk about this in many ways and the specific naming convention isn’t the point. The point is that the new operating rules for business in the social era will need to include shared-interest. The implications of this are not something to be taken lightly.

 

[By the way, there have been some great posts written on Netflix. One on courageous or recklessness. One on Netflix only trailing HP in the corporate strategy flipping category. And in what seems a tangent but I think talks to this point around consumers “collaborating”, recent brand research. And while I am not trying to make fun of Netflix, I did find this video a little too funny to not share. ]

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6 Responses:

  1. Emily. October 27, 2011 at 10:21 pm  |  

    Nicely put. The thing is that it is the job of a company to keep up with these shifts. That’s how Apple and Google surged ahead over these last years and Microsoft and IBM had to reorganise themselves in a defensive manner several times. Even Apple and Google now have lots of hard work ahead of them to avoid being lumped in with the bad guys.

    Netflix need a sea change in corporate culture to regain their best beloved status and that’s difficult to do. They can spend all the dollars they like on branding and PR but that won’t fix it. They were loved because they were disruptive. Now, they’re the establishment and they need to think how they can find the love in their new role.

    Oh, and they need to stop making silly mistakes, too.

    Reply
    • Nilofer Merchant. October 29, 2011 at 5:32 pm  |  

      Yes, the silly mistakes are crazy-making … but it’s this lack of getting what is happening in the world that worries me most.

      Reply
  2. Mark. October 28, 2011 at 2:02 am  |  

    I like how you framed this as Netflix having a social norm unexpectedly applied to it when it originally was disrupting a market (i.e. transactional) norm and they are now trying to self-disrupt (but not self-destruct). Ariely would be proud.

    I think you are on the right tangent with power brands and collaboration. I wonder if co-creation with consumers was an option in trying to deal with the new terms on the content side. It seems that everywhere you look, intermediaries for online content are not seen as value creators, but only as middlemen looking for a cut. Where’s the family night at home story equivalent to DVDs they picked out showing up in the mail? Can it be more than kid-friendly catalogs and ratings? Should they embrace the community more? Can they become the collaboration space for it/them?

    Reply
  3. Nilofer Merchant. October 29, 2011 at 5:34 pm  |  

    One of the first things I would do if I were them is to have an ongoing dialogue with customers about what they could to embrace community more. I noticed Roger Ebert pointing out that many “niche” films are not included on Netflix when in reality those “niche” films are the things that entertainment lovers thrive on. And remember how Tivo used to have movie stars curate their favorite movies. What if entertainment enthusiasts could curate movie lists. We would all want to “find more” cool stuff because of Netflix. There’s lots of things they could do to improve connection and love rather than continue in their transactional way.

    Reply
  4. Bruce McCarthy. October 31, 2011 at 2:46 am  |  

    Very funny video, but I wish I could say I agree with your premise about changes in society being behind how badly things have gone for Netflix recently. People have been forming emotional relationships with companies for as long as companies have existed. Apple has been a beloved brand since long before you could use one of their computers to connect to the Web.

    So has Coca Cola. Remember how the latter was punished for violating customers’ expectations of the brand and seeming to ignore their wants with New Coke?

    Remember the Exxon Valdeez? It would be stretch to say that people loved Exxon, but their expectations of how any corporation should behave were violated when it became clear that they cared more about profits than about safety or the environment.

    Netflix’s mistake wasn’t that they fell victim to some new 21-century social phenomenon. It’s never been possible for non-monopolies to ignore the needs and wants of their customers without suffering the consequences. Nothing outside of eternal human nature needs invoking here to understand why I’d be upset that a company I do business with decided to nearly double my price and make doing business with them more complicated with no more justification than it was their corporate strategy.

    More on this in the comments on my blog (http://www.userdriven.org/blog/netflix-abandons-quikster.html), but it seems to me what they missed was that profit maximization comes from delivering value to customers.

    Reply
    • Nilofer Merchant. October 31, 2011 at 7:43 pm  |  

      I hear you about being user driven. While companies always have the duty to deliver value to customers, the stock price ricochets due to the loud disaffection is new. Coca Cola might have had a problem with New Coke (a brand new product displacing an old product), their stock price at the time didn’t take a huge hit of this magnitude.

      Reply

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