3 Leadership Lessons from the Netflix Slide

Posted 10.26.2011

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?