3 Leadership Lessons from the Netflix Slide October 26 2011

Fortune's 2010 Business Person of the YearNetflix CEO Reed Hastings must be feeling a little bit like a team that ended up on the cover of Sports Illustrated and then started losing games. Last year, Hastings was on the cover of Fortune as its Business Person of the Year. This year, he’s getting slammed for what he acknowledges are a series of poor decisions and mishandled customer communications. It’s kind of like the dreaded SI cover jinx.

After raising the price for the Netflix DVD and movie streaming package over the summer, Hastings publicly apologized but didn’t change the terms of the deal. Then a few months later, he announced that Netflix was going to be just for streaming movies and a spin off company, Qwikster, would handle DVD rentals. Customers would no longer have a master movie queue online at one site. They’d have to go back and forth between the sites if they wanted both streaming movies and DVD rentals. Customers hated that idea and Netflix killed Qwikster a few weeks later. A lot of customers decided to just bail out. Netflix announced a few days ago that they lost 800,000 customers in the last quarter. The company’s stock has declined by around 35% in each of the past two days.

Hastings has given a couple of interesting interviews to the New York Times this week – one for the Sunday magazine and one for the Business section. I’ve been sifting through those articles trying to come up with some leadership lessons from the Netflix slide.

Here are three lessons that jump out at me:

Trust and loyalty are fragile things:  People loved Netflix because they could keep their movies as long as they wanted for a flat monthly fee. None of those annoying late fees that Blockbuster used to charge. Netflix basically crushed Blockbuster’s business model with that approach. Netflix customers loved and trusted them because the company made their lives a little more enjoyable for a nominal cost. That was the essence of the relationship. The changes the company implemented this year broke that quickly. People trust and have loyalty to other people or companies because they live up to their promises over time. With the changes they made and the way they made them, Netflix broke their promise. Customers walked.

Don’t get blinded by the data. In the interviews with the Times, Hastings talked a lot about how the data showed that DVD rentals had probably peaked and were declining. As he found out, the data didn’t show how people felt. His comments in the interviews suggest that his decisions were largely driven by the data. Leaders have to tune into the people behind the data.

Stay curious. Ask broad questions. Listen. There’s a great story in one of the articles about Hastings sitting in a hot tub with a friend and telling the guy that he was going to spin the DVD rentals out of Netflix and into Qwikster. The guy told Hastings that it was a terrible idea. Hastings ignored his friend because he thought CEO’s shouldn’t put much stock in their friends’ opinions. When the company ran focus groups on Qwikster, all they asked about was what people thought of the name. In the interviews Hastings referred to some of the decisions he’d made as arrogant. That seems fair. One way to avoid the arrogance that can come with success is to stay curious, ask broad questions and listen.

I’m sure many of you are Netflix customers. Are you sticking with the company or have you already left? From a leadership do’s and don’ts standpoint, what else have you learned from the way Hastings has handled things this year?

9 Responses to “3 Leadership Lessons from the Netflix Slide”

  1. Andrew Meyer says:

    What if there's an alternative?

    What if Qwikster was a move to get studios to make their content available via streaming rather than only making it available on DVD? Suppose Netflix was trying to give their customers what they want, content available via streaming, but the studios refused?

    There's no technical difficulty. The customers want it. How do you get an obstinate partner(s) to move?

    Others are putting forward a similar view: http://bit.ly/txKPJQ

    Does it change your perspective if Hastings was listening to his customers, understood the data and was trying to use Netflix's leverage to move a partner?

    Note: I have no relationship to Netflix.

  2. Rick says:

    I'm still a Netflix customer only because RedBox carries only the newest movies and my kids watch the streaming service on thier Xbox or Wii. I did drop from 2 DVD's to 1 DVD + Streaming. I'm augmenting with RedBox.

    Regarding his arrogance and thinking he was 100% spot on in his assessment that the spinoff to Quikster (I can't help but think of chocolate milk with that name) was the right thing to do, he soon found out otherwise and that communication is key. Not only with his customer base but also his employee base that no doubt were telling him what a bad idea it was.

    Hastings has been chewing on some serious humble pie. Netflix stock price was over $300 in July and has plummeted to $78 as of today.

  3. Mary says:

    I've left Netflix for Redbox. I liked getting the DVD because I didn't like tying up my internet to stream video, plus it just "felt better" to have the DVD (especially getting it in the mail was a treat!).

    Unfortunately, I can't watch the gag reel or additional products with Redbox. All I get is the movie.

  4. Well said Scott,

    I cannot help but wonder if another lesson is about watching your own impatience. I was not in the meetings of course, but the whole Qwikster thing looked like a rush to be in action and do something. How could they have gotten through the planning without SOMEONE checking Twitter? We often laud a propensity for action in our leaders, but it is an asset often overused until it is a liability.

  5. davidburkus says:

    Interesting post. I think Barry is right also about not jumping too quick into decisions. I once heard a wise man tell me "Never make a decision today that can be made tomorrow…you might get better data tomorrow morning."

  6. @ScottEblin says:

    Seriously, Barry. There wasn't someone on staff assigned to get the Twiitter handle? Pretty amazing.

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