How Netflix Nearly Lost Its Footing and What it Did to Recover
Both a movie studio and entertainment platform, Netflix has nearly 140 million subscribers and is the dominant player in the streaming services industry. But few remember that at the height of the recession, it came close to flaming out.
In general, recessions are good for the entertainment business. The Great Depression ushered in Hollywood’s “Golden Age,” as movies were an escape and a way to have an inexpensive night out.
Despite this, in 2011, Netflix almost melted down. It lost 800,000 customers almost overnight, and the company’s stock price cratered by 80%. Its customers, still reeling from the effects of the 2008 financial crisis, were counting every penny. This wasn’t the time for the company to lose their hard earned trust—but that’s what Netflix did.
To calm investor fears, Netflix’s stock price needed to stabilize. The road back required a gutsy and well thought out strategy with financial strength at its heart.
Anyone in finance can learn from Netflix’s story, a story of taking a long-term view of risk while managing customer dissatisfaction. It’s also an object lesson in how to not just stay afloat during a recession, but to use the learnings from one to drive a company forward.
The vision behind Netflix
Netflix made a name for itself in 1997 as pioneer of the DVD mail-order business, ultimately helping drive competitors like Blockbuster and Hollywood Video out of business. It was also a first mover in streaming video, taking a chance on its future success in a market now valued at over $22B and growing by leaps and bounds.
People liked the convenience of ordering DVDs by mail and streaming video at home. And with economical subscription bundles and no late fees, Netflix offered good value when consumers were more price conscious than ever. Between 2006 and 2011, its subscriber numbers ballooned 290%, from 6.3 million to 24.6 million.
However, for Netflix CEO Reed Hastings and his co-founder Marc Randolph, DVD rentals were just the start.
They always envisioned the company as a streaming-only video service. “One of the biggest challenges that we had was we had to come up with a premise for the company that was delivery agnostic,” said Randolph in a 2014 interview. “But if we were to come out and say, ‘This is all about downloading or streaming,’ and we said that in 1997 and ’98, that would have been disastrous.”
In short, their vision was clear to them, but not to others. This set the stage for confusion down the road. As Hastings later confessed, communication wasn’t his strong point. He believed that “actions speak louder than words,” an attitude that led to a near catastrophe in 2011.
The recession-era misstep that almost sank Netflix
In July 2011, the company pushed forward with an initiative that made sense in light of its aspirations as a streaming company. First, they announced that Netflix was splitting its plans into two parts: streaming video and DVD rentals.
Those who wanted both streaming and DVDs had to pay 60% more per month. Previously they’d been able to bundle both for just $2 more. Any other time, this might’ve gone through with mild grumbling. But this wasn’t any time. This was a painful, protracted recession.
The company attempted to spin it as offering subscribers choice. The could have “a streaming-only plan, a DVD-only plan or the option to subscribe to both.”
“Netflix members love watching instantly, but we’ve come to recognize there is still a very large continuing demand for DVDs by mail,” said Andy Rendich, Netflix Chief Service and Operations Officer. “By better reflecting the underlying costs and offering our lowest prices ever for unlimited DVD, we hope to provide a great value to our current and future DVD-by-mail members.”
But members weren’t buying it. In fact, most saw it as a cash grab, especially since on paper Netflix looked so healthy. Few understood the immense expenditures that were being laid out to keep Netflix on the cutting edge of streaming, including $30M a year to allow Netflix streaming subscribers to access 2,500 movies, TV shows, and concerts from cable channel Starz.
Three months later, Netflix put out an announcement made the situation exponentially worse. The company was now was splitting into two parts. Again, this all made sense in light of Hastings’ vision, but it didn’t take into account the headaches it created for customers.
There were to be two different sign ins and two different accounts. User preferences wouldn’t cross over. This meant subscribers were losing one of Netflix’s best features: personalized suggestions.
The DVD rental side was to be rebranded Qwikster, a name that was widely mocked and compared with Web 1.0 era startups that went belly up, such as Friendster, Napster, and Dogster. For many who were hoping the company would walk back the pricing decision, this was the last straw.
“Reed, thanks for reminding me that I should go somewhere else for my DVD rentals. It was an insult enough that you raised the price on me last month, right in the middle of the biggest recession since the Great Depression, but now instead of a sincere apology, all we get is excuses and a flimsy new name,” wrote one of the over 10,000 who commented on the company blog.
Customers bailed out almost immediately following the announcement. Netflix’s stock price tanked, from $300 a share in mid-July to $78 in late October, and sinking further from there. Analysts described it as a “nuclear winter” for Netflix, with many predicting the company’s demise. They also questioned Hastings’ leadership.
It would require a skillful strategy to pull the company back from the edge. Much depended on the finance team, led by former CFO David Wells, who Hastings later credited with “managing the company’s finances during a period of ‘dramatic growth.’”
