The Downfall of Netflix

September 19, 2011

Written by wukovits

NetflixI have been a Netflix subscriber for over 12 years.  As such, for a marginal monthly fee I’ve enjoyed a great number of movies and TV shows without the cost of purchasing them or the trips to the video rental store.  As their popularity and customer base grew, Netflix continued to gain steam; along their ascension to the top of the video rental apex, they managed to shut down “Mom and Pop” video stores and put the nail in the coffin for a few major chains as well.  Since their IPO in 2002, Netflix was regarded as one of the success stories; the company shifted the video rental paradigm for physical media and became a household name.

In 2007, Netflix launched into a new segment of the video rental marketplace, capitalizing on the proliferation of high-speed Internet and the spread of portable computing devices.  Their video streaming services went live with only a thousand titles at launch, but quickly their momentum grew and now, practically any device with “Internet capabilities” touts Netflix as one of its features.  With the progress of mobile phone technology in smartphone and tablet computing, the market for Internet streaming video increased exponentially.  Like any technological frontier, Netflix started to find some competition along the way, more so than any comers to their physical media rental business.  Still, Netflix is the clear leader in video rentals and seemed poised to be the obvious choice for ruling the video-streaming marketplace.

When Blu-Ray media hit the scene, they did give subscribers the option to receive Blu-Ray discs (if available) for a nominal fee of $2 per month.  While this might have seemed steep for some, it was an option, but when I purchased my first Blu-Ray player I certainly forked over that $2.  I’ve also opted for devices at my home that have Netflix capabilities built-in, paying more for these optional features to take advantage of the streaming services and lessening my need to have a vast collection of physical media to appease the entertainment needs of my family.  All said and done, I felt these up charges were reasonable, adding value and convenience at a token cost.

Now, in recent months, some more drastic changes have taken place.  The first shocker to the Netflix loyal subscriber base arrived in July in the form of a price hike.  For years, you could get have one movie at a time checked out and stream content for $10.  Suddenly, the price rose to a minimum of $16 for the luxury of having both physical media rentals and Internet streaming capabilities, charging $8 for each service.  While some were outraged, I didn’t feel as strongly.  While a 60% increase might be excessive, I use the service quite a bit and prices hadn’t been changed in a long time.  I went along for the ride since Netflix had been so good for so long.

In the beginning of September, it was announced that the partnership between Starz and Netflix would be coming to an end in February of 2012.  While this might not seem so drastic, as Starz is a premium content channel falling behind HBO and Showtime in terms of popularity, Starz also happens to control streaming media for Sony and Disney, which covers a great deal of streaming content that Netflix offers.  As it stood already, their streaming content selection was lacking compared to that offered on physical media, but this blow to the video behemoth rocked their stock value again.

Less than a week later, subscribers that use streaming services on more than one device at a time started getting messages about having a one-movie limit on the membership.  This threat struck close to home, as my family often watches programming in one room for the kids while my wife and I could watch something else in another.  After the word of this development spread online, Netflix made an announcement that this was a glitch they were trying to fix.  Whatever the story, another chink in the armor was struck.

Most recently, Netflix CEO Reed Hastings sent out a personal email and posted a blog announcing the latest change: Netflix would spin-off their physical media rental business into another company, which they christened “Qwikster”.  This missive, formulated as some sort of apology for the price hike two months ago, alienated the core customer base that brought Netflix to their meteoric rise: physical media rentals.  Netflix investors ran from this newest calamity, and their stock closed on Monday, September 19 at a value less than half of its peak two months ago.  To top this off, apparently whomever decided to name their new company didn’t do too much research, as the Twitter handle @Qwikster is currently being used by a young man whose hobbies include smoking marijuana, playing soccer, and plenty of sexual innuendo.  His avatar features the Sesame Street character, Elmo, seemingly smoking a joint.

I’m at a loss for what happened to this company.  I can justify price increases, and I can certainly understand how business dealings can fall apart between companies.  What I don’t understand is why a publicly traded company would continue to push away its customer base by making so many traumatic changes in so little time.  Couple that with some really questionable naming decisions for a new controversial company that will continue to distance stockholders and subscribers and it suddenly became clear to me:  maybe they had shared that left-handed cigarette with Elmo.

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