“American Classics” No. 8 – Netflix

Last summer, the popular American provider of streaming media, Netflix, made a series of choices that resulted in a crisis of public relations that resounded across the nation.  In an ongoing effort to redeem them from this disaster, the company has engaged in recovery tactics over the past year.  An analysis of their decisions leading up to and following these events is pertinent to the understanding of effective communications and the employment of ethical public relations practices.

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The year 2010 was a pivotal year for Netflix in terms of development and expansion.  During this year alone, the company entered into deals with major production studios such as Paramount, Lionsgate, MGM, Warner Brothers, Universal Studios and Twentieth Century Fox.  Furthering this rapid ascension into market dominance, they developed and offered applications of their service to be used on video game consoles such as the Playstation and Wii.  This was followed up by a deal with Apple, providing Netflix on iTunes for use with the iPad.

However, as many seasoned business professionals will tell you, rapid and largely unchecked success can leave a company in dire straits if it is not well monitored and studied in order to be perpetuated. Unfortunately, in an attempt to follow the societal trends away from physical DVD discs and largely toward online streaming, Netflix made their most infamous and as yet unmatched misstep.

It all began with their announcement on July 12, 2011. This stated that they would be henceforth separating their current plans into two separate plans: one dedicated to online streaming and the other dedicated to mail delivery of DVDs. Both plans, while separate, would cost the same: $7.99 a month. This spurred the first of an onslaught of customer revolt through multiple social media channels.  In response, the company defended itself in a blog post, which read:

“Given the long life we think DVDs by mail will have, treating DVDs as a $2 add-on to our unlimited streaming plan neither makes great financial sense nor satisfies people who just want DVDs.  Creating an unlimited-DVDs-by-mail plan (no streaming) at our lowest price ever, $7.99, does make sense and will ensure a long life for our DVDs-by-mail offering.”

Following this uproar, they furthered their endeavor by announcing that the mail order DVD service would be split into an entirely separate service and given the title “Qwikster.”  This new service was also to include video game offerings at an additional charge—an attempt at permeating a new market and competing with the service those companies such as Gamefly, provide. They assured that the only major difference between the two services would be the separate websites for each service. That being true, this structural change would also cause subscribers to pay a significantly higher amount if they wanted to retain dual service.  What they did not take into account was the fact that they were, in no uncertain terms, making their service more difficult and inconvenient for their customers to utilize.

The consumer uproar this time was heard internationally.  Three months following this announcement, Netflix issued a reversal and declaration of the re-establishment of their original service.  On October 10, 2011, CEO Reed Hastings announced the retraction of the split.  He explained this reversal by stating (on the company blog—again), “two websites would make things more difficult.”  Why this was not an initial thought escapes me, personally as a business professional.  Thus, Qwikster was scrapped even before its launch.  Unfortunately for Netflix, this turnaround was too little, too late, and the damage was unavoidable and nearly insurmountable.

Following their announcement of their return to their principle service structure, they announced an 800,000-subscriber loss, with more expected in the upcoming quarter. Despite this fact, their earnings continued to increase. At their absolute peak in July of 2011, Netflix shares were being traded at an all-time high of nearly $300 each. The announcement of their restructuring demolished this value to less than half, trading for around $130 that September.

“Consumers value the simplicity Netflix has always offered and we respect that,” said CEO Reed Hastings in yet another blog post.  “There is a difference between moving quickly–which Netflix has done very well for years–and moving too fast, which is what we did in this case.”

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One principle issue that the public found with the way this situation was handled was one of the most fundamental issues in the practice of public relations: method of communication.  Rather than hold a press conference, Reed Hastings decided to hide behind his computer screen and give nothing more to his public than a skirted apology posted on the company’s blog.

In my research, I found that many consumer bloggers and PR professionals alike agree: it is in times of PR crisis that companies must appeal to their consumers’ need for human emotion and implicate a strategy that employs a personal, human element.  It is essential that customers be provided with a face for the crisis, someone they can see and know is real, allowing them to express their grievances to another human being who can let them know they have been heard and respond appropriately.  In short, showing the people you care.  This involves direct participation on the part of senior management, not a posting on the corporate blog that for all they know could have been written by some college intern.

In cases like this, an immediate, concise and consistent message is the best first step toward recovery.  The easiest way to achieve this is through a press conference, which Reed Hastings never chose to hold.  He never put himself in an open public forum to make a statement and submit himself to the direct questioning of the public, which would have put them on a better path to their customers’ forgiveness.

In Netflix’s case, they completely overlooked the most basic reasons why their members left Blockbuster and Hollywood Video and came to them: convenience, time and cost.

According to an article by Ronn Torossian, CEO of 5WPR, the CFO of Netflix, Barry McCarthy has said in the past ““We have benefited enormously from the rapid growth in word of mouth (publicity). It has taken us to levels that we thought we would not soon see.”  Torossian went on to comment that it is essential for a company to apply these lessons not only during good times, but also in times of crisis. His article ended with a quote from Warren Buffet, “It takes twenty years to build a reputation and five minutes to ruin it.  If you think about that, you’ll do things differently.”

How would YOU have handled the situation? 

Leave it below!

Happy Consuming!

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