The Netflix Culture

If you have never viewed this presentation about the Netflix culture, you are in for a treat.  Check it out by clicking here.   I would point you to a few things, in particular, that I find insightful and refreshing.  

1. "Great workplace is stunning colleagues.  Great workplace is not day-care, espresso, health benefits, sushi lunches, nice offices, or big compensation, and we only do those that are efficient at attracting stunning colleagues."  How terrific!  People love to work with other highly talented, reliable, and kind people.    They do not like free riders, jerks, and people who don't invest time needed for self-improvement.  Think about when you went to college.  What made it a good experience?   The best courses were not simply taught by a talented professor.  They were courses in which the fellow students were intelligent, curious, reliable, and hard-working.

2.  Netflix chooses to focus on rapid recovery rather than avoidance of failure.  The firm argues that, in some environments, such as health care, we want to be highly reliable, i.e. avoid failure.  However, in creative environments, we should focus instead on rapid recovery.  

3.  The explanation of the nine behaviors and skills that the firm values in its employees is different than most "competency" models developed by company human resource departments.  The Netflix behaviors and skills are much less generic.  They describe specific behaviors, and they fit together to form a consistent whole.

4.  I like the "Keeper Test" a lot.  Here it is:  "Which of my people, if they told me they were leaving in two months for a similar job at a peer company, would I fight hard to keep at Netflix?"  The document states that you should let go of those who do not meet this test.  Make room instead for someone who will have the potential to meet this test.  It's tough medicine, but it really does make you think about whether you are keeping under-performers around too long. 

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Netflix & House of Cards

Last month Netflix launched a new original series called House of Cards.  The show, starring Kevin Spacey, tells the story of a Democratic Congressman named Frank Underwood.  It has received a number of favorable reviews.  What I find most interesting about the show, though, is not the plot or the acting.  It's the way in which Netflix introduced the show.  It released all 13 episodes of the show's first "season" simultaneously.   What a fascinating move!  Why?   We know that many Netflix customers engage in "binge viewing" of television series.  They will sit down and watch an entire season of a show over a weekend - all 20 plus episodes.  So, if that's the way that many customers enjoy watching TV series, why not give them an original series in the same format?  It seems fitting.

What's interesting, of course, is that none of the major television broadcast networks have chosen to launch a series in this manner.  Why not?  Why should they be beholden to the ancient once-per-week format for TV series?  If we know consumers like to watch episodes in bunches, why not roll out a series in that manner?  Broadcast networks have watched cable television and the internet erode their ratings for years.  They need to think creatively about their business model.   A move such as this one might be a good step forward. 

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The Olympics Deliver a Blow to Netflix

Procera Networks reports that streaming traffic on Netflix has fallen by 25% in recent days (reported on CNN Money website here).  The company believes that the Olympics accounts for the decreased activity on Netflix.  Indeed, Netflix has admitted that the Olympics may have an adverse effect on the firm this quarter.  I'm curious as to the financial impact, as less streaming on the part of someone who still pays the monthly subscription fee doesn't have a negative impact on Netflix earnings.  On the other hand, if the Olympics slows new subscriber growth, then the company has a problem.

This report makes me wonder what other firms might be adversely affected by the Olympics.  Will Redbox take a hit as well?  What about movie purchases and rentals via iTunes?   Do people go to movie theaters less often during these two weeks?  Perhaps sporting events such as minor league baseball take an attendance hit as well.  What do my readers think?  Any thoughts on the firms that might have a nasty financial surprise this quarter due to the two-week Olympic effect?

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Qwikster gone rather quickly

Netflix has abandoned its plans to separate its DVD by mail service from its streaming business.  Qwikster is dead.  The stunning twists and turns in Netflix's strategy have left most of us dizzy.  The collapse of the stock price in recent months proves that investors don't like uncertainty.  While it's ok to change strategy, investors do not want to see constant twists, turns, and reversals. 

Beyond the uncertainty, I was never quite clear regarding the notion that Netflix and Qwikster would not share information regarding a customer's queue, movie preferences, recommendations, and rental history.  That lack of sharing made me wonder whether Netflix was failing to capitalize on one of its greatest strengths, namely its powerful predictive algorithms that it uses to recommend movies.  Would lack of sharing across sites mean that it would not capitalize on the wealth of data that it had accumulated?   It wasn't clear based on what I had read.  To me, the predictive algorithms lie at the heart of Netflix's success, and no change in strategy should undermine that strength.   After all, the algorithms enabled Netflix to take advantage of the "Long Tail Effect" - the idea that a large percentage of Netflix rentals always came from movies that were not new releases.   That strategy proved very profitable over the years.
 

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SNL Parody - Netflix

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Netflix and Qwikster: What are they thinking?

Why did Netflix decide to split itself in half?  Why create a new brand called Qwikster?  Most people have criticized the move quite heavily.  Slate has an interesting article about the decision.  Farhad Manjoo writes that Netflix seems to have taken guidance from Clay Christensen's model of disruptive innovation.  Manjoo bashes the move in the first few paragraphs of the article, but then writes the following:


I think it's an idiotic strategy.... And yet: It could work. In The Innovator's Dilemma, Christensen argues that the companies that are most vulnerable to disruptive technologies are those that have really good management. The problem with good managers is that they tend to listen to customers. And the problem with customers is that they don't always know what's best for them. If you were a devoted Blockbuster customer in 2001, and if Blockbuster's CEO sent you an email announcing he was closing all the company's stores and switching to a DVD-by-mail service, you would have balked... As Christensen explains, disruptive technologies usually start out as inferior substitutes, proving attractive only to a small fringe of customers. For years, the people who ran Blockbuster saw Netflix as irrelevant. It's easy to call them stupid now, but at the time they were mostly right. Blockbuster's customers considered Blockbuster better than all the alternatives; if they didn't, they wouldn't have been Blockbuster customers. And Blockbuster's managers were doing what good managers do—they were investing in the parts of the business that customers liked (opening more stores) rather than coming up with a whole new business that might alienate their current users.  The key advantage of Netflix's new model is that it will give each side of the business—the DVD side and the streaming side—flexibility to manage its service in a way that pleases its own customers. As a combined service, any move to strengthen one side of the company over the other would have been perceived negatively by one group of customers. 

For me, the negative reaction to the move has more to do with the seeming inconsistency of management's actions than anything else.  Several months ago, Netflix championed an integrated service at a low price.  Then, they raised prices dramatically on the integrated service, but allowed customers to opt for a lower priced streaming-only service.  Then, after a short period of time, they announced a split into two brands, one for streaming and one for DVD-by-email.  The series of changes in strategy over a short period of time give the impression of a management team unsure of how to move forward.  That makes investors uneasy (rightfully).  Secondly, people have criticized the move because they don't necessarily see the connection between setting up a separate business unit and establishing a second brand.  In Christensen's writings, he provides several good examples of companies establishing independent units to pursue an innovation, without necessarily creating a new brand. Take IBM's creation of a unit to launch the personal computer; it existed independent of the mainframe business, but it leveraged the existing IBM brand.

Despite all the questions, I understand Netflix's predicament.  They face unchartered waters, as a young growing company facing the inevitable demise of the original business.  In the old days, companies may have experienced the disruption of their core business after decades of success.  For Netflix, that demise of the core may be occurring just a decade after the firm rose to prominence.     

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NetFlix: Value-Based Pricing Run Amok?

As everyone knows by now, NetFlix spurred a major consumer backlash with its significant pricing increase.  As I considered how they might have arrived at this decision, I began to focus on how NetFlix management might have analyzed the value that they provide for consumers.   In value-based pricing, companies examine the customer's economics, and they evaluate the cost to the consumer of purchasing an alternative.   How would this work for NetFlix?   Management would examine the customer's options, and they would calculate how much consumers would have to spend to purchase a service roughly equivalent to the one that NetFlix is offering.  If NetFlix executives examined it this way, then you can see why they might have arrived at a decision to raise price significantly.

Some have argued persuasively that they don't see a customer-friendly alternative to NetFlix at the $10 per month price point, with access to new releases and a more extensive library of older movies (which NetFlix provides through a combination of DVDs and streaming).  Thus, I can see how the decision was made.  It doesn't mean that it was a smart move.  They clearly created quite a backlash.  Moreover, as Nilofer Merchant wrote yesterday, they might have communicated and executed a price increase in a way that did not set off such a furor.

What will most interesting, though, will be to see what customers do, not what they say on social media.  How many will actually follow through on the threat to abandon NetFlix, and where will they turn.  NetFlix seems to be betting that the consumer's options aren't all that attractive, and many will end up sticking with the company despite all the complaining.  We shall see. 

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