Netflix Strategy is Right and Wrong

September 20, 2011


There are several important lessons to be learned from the Netflix brand story. In recent days, the story has heated up after CEO Reed Hasting’s Sunday night email blast and blog post.

In his email, Hasting apologized profusely, then turned around and further enraged his loyal 23-million subscriber base by taking the Netflix brand away from its red envelopes. Let me break down the good, the bad and the ugly of this classic story.

In the beginning.

Netflix was founded in 1997 and two years later it became the subscription-based DVD-by-mail service millions of customers in the United States and around the world were incredibly passionate about.

Netflix turned the Blockbuster model on its head. With its strict and steep late fees, Blockbuster created a lot of unhappy customers. So Netflix did the opposite and let consumers keep a movie as long as they wanted. When they returned one movie, they got another one.

It wasn’t as fast as Blockbuster; customers had to wait to get their DVDs in the mail. But no late fees, the fun of picking out your own movies, and the excitement of seeing the red package in the mail built a powerful Netflex brand.

Intense consumer loyalty and unbelievable word-of-mouth helped the Netflix brand took off like a rocket. Ten years later, Netflix had a library of 100,000 titles and 10 million subscribers.

Today, Netflix has 23 million subscribers, a high-flying stock and is very profitable. Last year its stock increased over 200%. Revenue in 2010 jumped 29% to $2.16 billion and net income was up 39% to $161 million. But with profits sometimes comes arrogance.


What’s next

One thing is always certain with technology: change is coming. In music, we went from record, to tape, to CD to digital. In video rental, we went from Betamax, to VHS, to DVD, to pay-per-view, to digital streaming.

Yet, it takes time for a new technology to completely replace an old one. This leaves existing brands in a bind. Do we stick with our profitable bread-and-butter product or do we move to the new technology? It might be small now but one day will probably take over the industry? How do we cross the chasm?

Netflix owns movies-by-mail. They might make a lot of money today, but are not the future. Netflix has wisely bet on streaming as its future. And they have wisely made an aggressive move to be first in the mind in order to dominate the new streaming-video industry. Currently, Netflix is the leader in the category.

But Netflix made a critical error by using the same name on its new streaming business as it does on its existing mail business. It might be logical to take a trusted and loved brand name and extend it from one business to the next. But it doesn’t make marketing sense. As time goes, each business will compete and clash with each other. Having the same name on both businesses is confusing from both a product and especially a pricing stand-point.

What Netflix needed was a new brand name. In his email to subscribers,  Reed Hastings eloquently points this out. Except there is one huge problem. Netflix needed the new name for the streaming business and not the mail business.

Netflix means mail. You can’t move a brand so strongly held in the mind into a new position, especially one that is more technologically sophisticated. It is the same reason Barnes & Noble had trouble moving online for books (with the B&N name.) Or Blockbuster had trouble moving from stores to mail or streaming with the Blockbuster name. Both Barnes & Noble and Blockbuster needed new brand names for their online businesses. Now Blockbuster is bankrupt and Barnes & Noble is in trouble. They lost $74 million on sales of $7 billion last year.


Too late

Netflix also made a huge error by doing the name change now. The time for the new streaming brand name was when it launched its streaming business. Not several years later.

Netflix should have launched the new brand using its strong Netflix brand as the endorser. Never underestimate the power of a second brand. Especially when it is launched by a leader. Toyota successfully used this strategy when it launched Lexus, Scion and Prius.

You can’t change the past, but this summer Netflix had much better options than the ones it chose. In July, the company announced price hikes and new separate streaming plans. Almost two months later, it took the Netflix brand away from the 23-million loyal subscribers who love it and slapped it on its streaming service.

To add insult to injury, Netflix will give its movies-by-mail customers a new brand name, Qwikster. Why not just throw your customers down and stomp on their faces?

This summer, the better alternative would have been to buy Hulu. Netflex could then have used Hulu as its streaming TV/movie brand. Netflix, of course, would remain as the mail brand.


When you need a better name, buying a company to use its name can be a great strategy. Chemical Bank bought Chase. And ValueJet brought Airtran.

And if the rumors are right, and a spin-off is in the process, leaving the Netflix name with the mail business would make it more desirable to potential investors. Who wants to own Qwikster? The value of a business has a lot to do with a strong brand name.

For Netflix the future is uncertain. They have created a mess of their own making which has gotten customers extremely angry. The strategy of keeping up with a rapidly-changing technology by launching a second brand was an astute one. Unfortunately they fell down on the branding part and got it all backwards. Netflix is mail and the new brand should have been streaming. Sad to see it happen to such a nice company. Reed, next time call me first.