Where some see the Netflix changes as a disaster, I see great leadership

by jeffhilimire on September 26, 2011

Last week Netflix’s CEO, Reed Hastings, announced that the company would be separating its digital business from its DVD business. The DVD business would operate as a new entity called Qwikster. You can read more here.

This move came on the heels of a recent price change by Netflix that made it financially inconvenient to subscribe to both the streaming and the DVD service. Customers were outraged, as customers are welcome to be, when a company changes the game on them.

Hastings has received a lot of criticism for these two moves. I personally think this is a sign of great leadership.

I believe that Hastings has come to the correct conclusion that for Netflix to succeed it has to fully embrace the streaming side of its business and that the DVD business, while still generating significant revenue, is going to drastically fall off over the next few years. I’m also suspecting that the DVD business if far less profitable than the streaming, but this is just a presumption on my part.

Either way, I think its clear that Hastings has come to the conclusion that his company’s future is in digital streaming. Let’s make that the baseline for the rest of this discussion. Asssume the CEO feels strongly in that fact.

He then has a two options. He can continue to run what are two very different businesses under one roof until eventually the DVD business diminishes. Or he can try to figure out a way to essentially get rid of the DVD business and focus all of his energy on the future of this company. Right or wrong — I happen to think he is right — he has decided to take the second path.

Keep in mind the second path, to effectively “get rid of” the DVD business, is extremely risky and controversial. It is by far the harder path of the two for a leader. He gets this wrong, or if he doesn’t get enough time to prove it out, he’ll lose his job. He’s risking everything by going this direction.

His first strategy was to make it a financial decision for his customers so that it was painful to pay for both services. His hope was that people would migrate over to the streaming because they didn’t want the increased cost. So far, many of my friends who were getting both services were first irate, “They are treating their customers like sh&t” and then almost immediately admitted, “So I’m going to switch to just streaming.” So the strategy I’m guessing was working.

But the backlash was strong and the stock price has taken a beating along the way.

Netflix's stock has dropped significantly in light of their changes

Hastings then decided that rather than force his customers to change to streaming, if people still wanted the DVD service, then the better solution was to find a way to give it to them without allowing that side of the business to pull the streaming side down with it. He wants to focus all of his energy on the future of his company, not protecting the past. So he decided to carve off the DVD side into a new entity, Qwikster, and allow people to subscribe to that service independent of Netflix.

People are poking a lot of criticism and sarcasm his way for this decision. I see it very differently.

Hastings has the confidence to lead his company to where he believes the puck is going, not where it has been. He’s risking everything to do what he believes is best for the company. As a leader, if you’re not willing to put your neck out there for the betterment of your company and your people, then you’re not living up to your expectations and responsibility.

I’m reminded of this quote by Howard Schultz (Starbucks CEO) from his book, Onward:

I’ve never bought into the notion that there is a single recipe for successful leadership. But I do think effective leaders share two intertwined attributes: an unbridled level of confidence about where their organizations are headed, and the ability to bring people along.

 

  • http://kylegport.com Kyle Porter

    Solid post Jeff. I like the stance you take and the leadership angle. The big unknown is how strong inventory selection will be with streaming & what the competition will put up. Another item to think about is the cash coming in from the mail order side. Regardless of streaming, I’m confident that they’ll still be able to rack up some serious $ there. Think about how long Earthlink cash cowed on dial-up. Absolutely they needed an aggressive success plan and this seems like a good educated guess on the answer.

  • Anonymous

    The more I think about it, the more I conclude that content owners are forcing Netflix into a market nobody is that excited about.

    I started a Netflix subscription with the implicit promise that they could get me every movie I ever wanted, and I’d never have to go to Blockbuster again. The DVD business still provides most of that. The streaming service selection, for my desires, is abysmal. Less than half of the IMDB top 250, I think.

    It’s not their fault, really. The content providers are putting the genie back in the bottle. No company will have a comprehensive film library for a reasonable, fixed, monthly fee. Netflix is being forced into the corner of being a digital version of HBO. It’s not that they won’t be a good company. It will just be hard to differentiate against HBO, Cinemax, Showtime, and whoever else goes digital. Exclusivity will fragment availability of popular movies.

    I think many, myself included, are mourning the death of a service we thought could exist – a subscription-based streaming movie service with all of the variety we were used to from the DVD business. Hastings is leading in the best direction available to him. More than anything, I think he could learn to deliver a little bit of good news with the bad.

  • Helen Kopp

    so true. I think there could have been a little more explanation and thought, in handling customers, to prevent such a big backlash.  Personally, when I heard of the changes I thought “well, i’ve felt like i’ve been getting a steal watching so many movies for so cheap, so i’m not surprised.”  But I never considered they might be trying to get people to give up the DVDs. I switched our account to all streaming. We never bothered to watch the dvds anyway.

  • Empyrean

    I’m with robkischuk on this. I have the NetFlix streaming coming through my iPod and my Google TV, but it is bland, to say the least. My mom and dad, however, are enjoying all the home DVD benefits from NetFlix. Part of the reason for the split is due to the ever increasing costs for TV shows. 

    I think that Netflix had to make the split so that they can keep both sides profitable, otherwise, the increasing costs for the DVD customers would just be too expensive to keep, especially if they aren’t doing the streaming. 

  • http://twitter.com/GumboShowJoe Joe Koufman
  • http://www.jeffhilimire.com Jeff Hilimire

    Well I’m really surprised by this news, but I don’t think it changes my initial reaction which is that Hastings made a couple of very bold, extremely controversial decisions in order to point his company in the right direction. While he wasn’t able to win this battle (my spider sense says that the pressure became too much and the board intervened and forced the change back), he clearly is a leader that is thinking long-term and that will benefit Netflix going forward, IMHO.

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