NETFLIX REDUX

Posted in competitive advantage, Crisis Management, Gauge Your Competition, NETFLIX, Respect your customers, You Don't Have a Monopoly on October 27th, 2011 by mnayor

Those fickle consumers! After being presented with a whopping monthly price increase of 60%, 800,000 U.S. subscribers bailed on Netflix in the third quarter of this year. And the company’s stock tanked as a result. At the close of business Monday October 24th the Company’s stock was at 119. By Tuesday morning it was at 75 and currently hovers at 80. In July it was $300. This, while the company has negotiated a potentially great deal with Dreamworks Animation and posted third quarter earnings that rose an impressive 65% from $38 million to $62.5 million. What does this say about investor confidence?

True, the Company has admitted candidly to shareholders that it moved too quickly and dramatically to raise prices although it has emphasized that the new prices are where they have to be in the longer term. But, there is a bit of defiance in between the lines. Interviewed by The New York Times for its October 23rd Magazine Section, Reed Hastings, CEO of Netflix observes that when Netflix started its stock price was $7.50 and it had a million subscribers and it is a mistake to measure everything by what happened recently. Fair enough.

But there seems to be a failure to recognize the obvious. Competition not only looms in the wings. It’s right in Netflix’s face. Confidence is good. Over-confidence can be dangerous. Hastings fails to recognize that Netflix does not have any special competitive advantage in its industry. Yes, it clobbered Blockbuster and yes it got a good jump on internet streaming. However, here’s what is competing with Netflix, now and in the future: cable networks, Direct TV, Dish, Hulu (currently being courted by Google and Amazon), Redbox, and that old stand-by Blockbuster which certainly sees an opportunity to jump back into the game big-time.

Netflix no longer has a monopoly on a product or an idea. Thus it must now compete on service and price. Unless it discovers a new method of delivery or obtains a lock on new products, it will have to provide a superior product at a fair price if it wishes to continue to distinguish itself from its competitors. Which may mean its heyday is over. And that’s the lesson all businesses can take away from the Netflix experience. Better to compete like you have competitors breathing down your neck rather than act like you are the kingpin to whom all customers shall pay homage.

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