Netflix quixtar

W12850 NETFLIX INC.: STREAMING AWAY FROM DVDS1

David Wesley wrote this case under the supervision of Professor Luis Alfonso Dau solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Richard Ivey School of Business Foundation is the exclusive representative of the copyright holder and prohibits any form of reproduction, storage or transmission without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca. Copyright © 2012, Northeastern University, College of Business Administration Version: 2012-04-05

The very concept of physical media is racing toward obsolescence. – Steven Levy, author of The Perfect Thing: How the iPod Shuffles

Commerce, Culture, and Coolness2 On a clear summer evening in 2011, Reed Hastings, founder and chief executive officer (CEO) of Netflix Inc. (Netflix), decided to visit a friend near his home in Santa Cruz, California. During this visit, Hastings shared an idea that he had been considering for some time — splitting his company’s DVD rental business from the online streaming business. “That is awful, I don’t want to deal with two accounts,” replied the friend, who was also a Netflix subscriber.3 Unconvinced by his friend’s objections, on July 12, Hastings publicly announced his plan and a corresponding increase in fees (see Exhibit 1), both changes to take effect on September 1. The reaction was swift and brutal. Over the next quarter, Netflix lost 805,000 subscribers, its first decline in membership in more than a decade. At the same time, the company’s stock dropped by more than 50 per cent from a high of $300 per share prior to the announcement.4 In an apologetic letter to subscribers, Hastings admitted that he had “messed up.” “I owe you an explanation,” he wrote (see Exhibit 2).

It is clear from the feedback over the past two months that many members felt we lacked respect and humility in the way we announced the separation of DVD and streaming and the price changes. That was certainly not our intent, and I offer my sincere apology.

1 This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this case are not necessarily those of Netflix Inc. or of any of its employees. 2 Steven Levy, “Young’s Frankenstein,” Wired, July 2009, p. 54. 3 Nick Wingfield, “A Juggernaut Stumbles,” The New York Times, October 25, 2011, p. B1. 4 Todd Wasserman, “Netflix Loses 800,000 Customers in Quarter,” Mashable Business, October 24, 2011, http://mashable.com/2011/10/24/netflix-loses-800000-customers-in-quarter/#314677-Netflix-Stock-Plummets-27-Following- Earnings-Report, accessed January 11, 2012.

For the exclusive use of S. Sayeste, 2018.

This document is authorized for use only by Sibiya Sayeste in Strategic Managment taught by Fairweather, Peter, SUNY - New Paltz from January 2018 to May 2018.

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Although Hastings apologized for the way the plan was executed, he continued to defend the new structure. Meanwhile, Netflix began to face new competition from a variety of video streaming services, including Apple iTunes, Amazon Video on Demand (VOD), Hulu and Google TV. Even YouTube, which had previously limited its service to amateur video sharing, began to offer advertising-supported films and television shows. In addition, cable and satellite providers started to roll out their own video streaming services at no extra cost to subscribers. Since most Netflix subscribers relied on cable and satellite to provide them with content not available on the Internet, such as sporting events and cable news programming, Netflix content was becoming increasingly redundant. Moreover, unlike the DVD rental service, the new streaming-only service did not offer recent films, due to the unwillingness of content distributors to enter into flat-fee contracts. Streaming was not the only service where Netflix faced new competition. Redbox Automated Retail, LLC (Redbox) supplied DVD kiosks in high-traffic locations across the United States. Each of the 29,000 kiosks offered as many as 200 popular movie titles,5 which could be rented for as little as $1.00 per day ($1.50 per day for Blu-ray discs and $2 per day for videogames).6 Low rental fees, convenience and availability enabled Redbox to capture 18 per cent of the DVD rental market share in 2009, which grew to 25 per cent in 2010.7 Media analyst Michael Olson believed that for Netflix to remain competitive, it needed to expand its online catalog.

I understand why they’re making this move toward streaming from a long-term perspective, but the only way they will now be able to make investors believe in them, and subscribers continue to be attracted, is to have a waterfall of new content in the next few months.8

However, Hastings had always maintained that Netflix would not seek new releases from its content partners, who demanded pay-per-view rates. Instead, Hastings’ solution was simple — go to Amazon or iTunes. “Both of the services, iTunes and Amazon, are pretty comprehensive,” he said. “We’re focused on the subscription — unlimited for a flat fee.”9 On November 25, Netflix stock fell to $63 per share.10 BACKGROUND Reed Hastings and Marc Randolph co-founded the Los Gatos, California-based company in 1997 to provide online rentals of DVDs. At a time when technology pundits saw online streaming as the future of 5 Redbook Automated Retail, LLC, “Media Center: Facts about Redbox,” https://www.redbox.com/facts, accessed March 21, 2012. 6 Redbook Automated Retail, LLC, “General Questions: Price Change,” https://www.redbox.com/pricechange, accessed March 21, 2012. 7 Erik Gruenwedel, “Analysts Downplay Redbox’s ‘Messy’ Quarter,” Home Media Magazine, July 30, 2010, http://www.homemediamagazine.com/redbox/analysts-downplay-redbox%E2%80%99s-%E2%80%98messy%E2%80%99- quarter-20180, accessed March 21, 2012. 8 Ronald Grover and Cliff Edwards, “Can Netflix Find Its Future by Abandoning the Past?” Bloomberg Businessweek, September 22, 2011,