Netflix is one of the Silicon Valley giants and one of the most successful entertainment companies in the world. It rose to prominence by 2010 but in 2011 faced serious problems. Netflix lost 800,000 subscribers (Wingfield and Stelter par. 5), which was the first decline in membership in years. The reason was the decision to separate two primary services the company provided, DVD rental and video streaming. Unsatisfied with the new model, subscribers all over the United States heavily criticized Netflix, causing its stock rating to go down significantly. This case provides a valuable example of decision-making and strategic planning in the business world. To learn from this case, it is important to identify the problems the company faced, analyze the situation, and come up with possible solutions and recommendations.
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First of all, the problems that Netflix had in 2011 have to be identified. The company introduced a new business model that was initiated by the co-founder and CEO Reed Hastings. It implied dividing the services that Netflix provided into two separate parts. Previously Netflix services had come with a single subscription, but since 2011 users had to acquire two different subscriptions, one for streaming and one for ordering DVDs by mail. Additionally, the right to both receive an unlimited amount of DVDs by mail and watch an unlimited amount of movies and TV shows over the Internet, which had cost most users 9.99 USD per month, became over 60 percent more expensive, 15.98 USD per month. The result was that Netflix received a lot of criticism from subscribers, analysts, and the market (Thompson 127). Over 800,000 members terminated their subscriptions. The stock price lost 43 percent.
Analyzing why Netflix faced such trouble should focus on the company’s internal decision-making as well as its response to new circumstances. First of all, it is important to understand why Netflix decided to separate DVD by mail service from streaming service. Hastings explained that, after 12 years in the DVD rental and delivery business, the company had wanted to focus on the new and rapidly developing sphere, namely streaming, so it decided to separate the two businesses. However, this explanation appeared online two months after the change had been introduced. Hastings admitted that he should have provided this information earlier (Thompson 128). Another thing that Netflix was criticized for is that they were separating their services at the time when the general direction of the market was to integrate services. Many other high technology companies were trying to make things easier and more accessible to customers, while Netflix introduced something that was ultimately less convenient to their subscribers.
Therefore, the recommendations for the case lie in the areas of communication and integration. Netflix should have communicated its reasoning behind the separation of services before the change was introduced. The company also should have explained what was being modified in terms of its services on the users’ end before facing extensive criticism. The analysis shows that much of the users’ dissatisfaction was caused by a misunderstanding of the new business model. Therefore, the negative response could have been mitigated through more elaborate communication. Another issue is that the business model itself was not successful from the very beginning. Splitting its business, Netflix made its subscribers deal with two accounts instead of one for the same services. Instead, the company should have followed the experience of other corporations that succeeded through integrating their services and creating more convenient conditions for their customers.
The Netflix case demonstrated interesting issues of the modern business world. Preoccupied with its organizational development, the company adopted a new business model that ultimately made its services less convenient and more expensive to the users. It also failed to communicate the reasons behind adopting the model, which caused users’ dissatisfaction and a decrease in the stock price. Lessons that can be learned from analyzing the case are to give priority to ultimate users’ convenience and to communicate extensively the essence and reasons of every change introduced.
Thompson, Arthur. Crafting & Executing Strategy 19/e: The Quest for Competitive Advantage: Concepts and Cases, New York, NY: McGraw-Hill Education, 2013. Print.
Wingfield, Nick, and Brian Stelter. “How Netflix Lost 800,000 Members and Good Will.” The New York Times. 2011. Web.