Netflixed

by Gina Keating

  Following close on the price hike fiasco, Swasey set up a round of interviews with high-profile financial news outlets to try to do damage control but Hastings, backed by Friedland, refused at the last minute to do them, leaving Swasey to mop up once again.

  So Rendich reached out to someone who had plenty of experience pulling Netflix out of PR messes—Ken Ross. When Rendich called about two weeks after the YouTube video debacle, Ross advised the Qwikster CEO to lob the problem back to where it originated.

  “This is Reed’s and Leslie’s headache,” Ross told him. “This is Jonathan’s and Steve’s problem. This is Netflix they are angry at.”

  The ridicule had started to taint Qwikster before it even got off the ground. No launch date had been set. Netflix had failed to secure the @qwikster Twitter handle from a profane, pot-smoking soccer fan named Jason Castillo, whose plans to profit from Netflix’s mistake were provoking much mirth in the media.

  Even the name Qwikster evoked derision—as though Netflix had chosen the terminally uncool moniker to drive customers away from DVD by mail in shame. But under Rendich and Ross’s direction the Qwikster team did what they learned to do at Netflix—focus and perform. They forged a plan to position Qwikster as a reliable bridge to an online rental future of unlimited movie choice.

  Slowly the vitriol began to ease, but it was simply too late for Qwikster. Netflix’s stock price had been hammered from an all-time high of $305 per share before the price increase to $65 after the debacle. Hastings, the author of both mistakes, canceled Qwikster’s launch and took the DVD by mail service back under Netflix’s umbrella—at least temporarily.

  Rendich, a twelve-year Netflix veteran, resigned. About one hundred others lost their jobs, including many who left senior posts at Netflix under the assumption that Hastings was committed to Qwikster. Kilgore announced a short time later that she would cede her post as chief of marketing to her loyal lieutenant, Jessie Becker, on an interim basis. Kilgore took a seat on the company’s board.

  In a curious move, Hastings reorganized Kilgore’s marketing department in what some said was a long-held desire to increase his own power over the one function at Netflix that he understood the least—customer and public relations.

  It was never clear whether Hastings realized that the Qwikster debacle was as much a betrayal of the people who had zealously built and protected Netflix’s brand over the years as it was a slap to subscribers who had invested their loyalty in the company.

  When Rendich and his team first asked how they should think about what had happened to the brand, Ross was hard-pressed to find an equivalent situation. He thought for a moment, and then it came to him—Tiger Woods. The champion golfer had seemed almost godlike until a sordid infidelity scandal destroyed his marriage and marred his career. Woods fell harder and faster than a regular celebrity, because he had been so esteemed.

  That’s how you have to think about Netflix, Ross told them. That’s not to say the company won’t regain its footing. But the damage is irreparable. Now it’s just another brand.

  • • •

  MARC RANDOLPH WATCHED the furor unfolding around Qwikster, paged through the tens of thousands of angry comments that appeared on the Netflix Web site, thought about what it all meant. There was no question that Hastings had damaged the brand with his tone-deaf launch of the price increase and Qwikster, but Randolph thought the decision to split the DVD and online services had been correct—just as it had been right for Netflix to give up DVD sales more than a decade earlier to focus on becoming the superlative in online rental.

  “[W]hat is truly mindblowing is that when I was CEO trying to screw up my nerve to walk away from selling DVDs, I risked alienating tens of thousands of customers. Reed is showing that he has courage and conviction to do the right thing despite having tens [of] millions of them,” Randolph wrote on his blog, Kibble, in September 2011.

  In the years since he left Netflix, Randolph had traveled a little and returned to work in Silicon Valley advising tech start-ups. It still amazed him how often he was approached by young entrepreneurs who wanted to start the Netflix of—something—just as he had wanted to start the Amazon of something. But to his young protégés, “the Netflix of” seemed to involve simply ordering something on the Web and round-tripping it to customers’ homes and back. Was perfecting a way to ship plastic disks around the country all they had accomplished at Netflix?

  The depth of public fury surrounding Qwikster surprised Randolph as much as it revealed that consumers felt that they had really lost something irretrievable in Netflix’s steep fall from grace. Although it existed to its subscribers as little more than a red envelope in the mailbox or a flickering image on a screen, Netflix was as real to them as the groovy little video store on the corner where the clerks knew what they liked and the movies were always in stock.

  To them, Netflix was not just a movie delivery service—it was the very best way to find something they wanted to watch, a friend with whom they shared their deepest secrets about what truly delighted them, and someone they trusted to provide an even better experience the next time they met. To think that it was all just a bunch of algorithms was simply too heartbreaking to bear.

  Then it occurred to Randolph, in a rush of feeling: “Holy shit, we did it.”

  EPILOGUE

  GO TO THE MAILROOM OF almost any American workplace on a Monday morning, and in the plastic U.S. Postal Service bins you are sure to find a litter of red envelopes waiting to be collected with the outgoing mail. Nearly every U.S. mail truck carries a separate bin for red Netflix envelopes, because the Los Gatos, California, company is the postal service’s biggest customer. Now Netflix is even larger than the number one U.S. cable company, Comcast. Its subscribers claim 35 percent of U.S. Internet bandwidth by streaming movies during evening hours—the largest source of Internet traffic overall. In 2011, Netflix replaced Apple’s ubiquitous iTunes store as the top U.S. online seller of movies and TV shows—its signature subscription service claiming 44 percent of total online movie business to 32 percent for Apple.

  It is the world’s largest Internet movie subscription service, with growing influence in how movie distribution deals and laws pertaining to online bandwidth usage and traffic are made. The service has even prompted international political action; Canadian subscribers called for an end to national bandwidth caps in 2011, in part to better watch Netflix movies in high definition.

  The Netflix mailer has featured prominently in American pop culture: as a prop; as a mention on prime-time television shows; twice as a clue in the New York Times crossword puzzle; as a punch line on late-night talk shows; and even as a verb (“We can Netflix Prison Break, can’t we?”). So powerful was the illusion that Netflix could be a trusted member of consumers’ households that the clumsily executed 2011 price hike and split-off of the company’s DVD by mail service as Qwikster provoked a remarkable sense of anger and betrayal. Subscribers took what Hastings did very personally, because Netflix had encouraged them to participate in creating a flawless interface between consumers and commerce, and people and technology. The fact that the company once listened set it apart from its rivals and accounted for much of its success against them.

  The ongoing dialogue between the consumer and the business is a development of the modern age that Randolph and Ross understood well but Hastings does not seem to want to acknowledge. This is evident in his recent moves to purge Netflix of dissenters and push ahead with his plan to split the company in a manner that advances his scientific aims but alienates consumers.

  As Randolph’s great-uncle, Edward Bernays, wrote in 1928 in his book Propaganda: “The public has its own standards and demands and habits. You may modify them, but you dare not run counter to them. The public is not an amorphous mass which can be molded at will, or dictated to.”

  No matter what happens to Netflix, consumers have adapted to a new typ
e of movie watching, courtesy of Reed Hastings and Marc Randolph. Randolph gave Netflix an extraordinary start, and Hastings turned it into a force that changed the world.

  In its fifteen-year run Netflix has grown from an innovative yet struggling start-up with a big target on its back into a disciplined $5 billion corporation with international reach and a huge margin for growth, as worldwide broadband penetration cruises past 50 percent. Its DVD library is the world’s largest, with two hundred thousand titles that reach into every country and every genre, opening to subscribers—as only film can—lives and points of view we otherwise might never know. Its streaming service has grown from one thousand titles at its launch in January 2007 to forty-five thousand that can be streamed on more than seven hundred devices. The company signed a paradigm-shattering deal in late 2011 to stream DreamWorks Animation SKG’s popular films in the pay-per-view window starting in 2013.

  By using the goodwill accrued over years of peerless customer service, Netflix persuaded subscribers to have patience with a limited selection of streaming titles, and to see the future of home entertainment in the elegant technology of instant streaming and the Cinematch algorithm. Hastings’s ruthless and unwavering focus on the top prize—getting the largest selection of content possible straight from the Internet to any video-capable device—prevented Netflix from becoming bogged down in the intermediate stages of physical media distribution.

  Had Hastings bowed to shareholder pressure in 2005—when he vowed to sacrifice profits for as long as it took to run off Blockbuster, Amazon, and Walmart and reach a decisive but then unlikely twenty million subscribers—it is likely that the journey between the Internet and the television would have taken years longer.

  While Hastings has insisted that Netflix has no intention of turning cable customers into cord cutters, the cable industry should take heed. Consumer dissatisfaction with being tied to tiered cable plans—with hundreds of channels they did not choose and aren’t interested in watching—bears a suspicious resemblance to Blockbuster’s toleration of managed dissatisfaction. The cable industry, which has carved up the country into minimonopolies, is ripe for a Netflix-led insurrection over high prices and poor service.

  But this is how the free market is supposed to work: A better product, a clean balance sheet, and a near flawless execution of a business plan should be enough to win the customer and vanquish an outdated rival.

  It is hard to recall what was once enjoyable about driving to the video store on a Friday night as you settle back into the cushions of your living room sofa, a bowl of popcorn in your lap, and flip on the television to see what Netflix recommends. In her bedroom upstairs your teenage daughter finishes her homework and pulls up Amazon Instant Video on her laptop and buys the new film Bridesmaids and watches it while she chats with her friends on Facebook. Meanwhile, your next-door neighbor slips a DVD of Thor that she rented from the Redbox kiosk at the grocery store into the Blu-ray player for her kids to watch while she cooks dinner.

  This is how America watches movies now, all of it brought to you by Netflix.

  AFTERWORD

  FOR NEARLY TWO YEARS AFTER the Qwikster debacle, Reed Hastings disappeared from public view—and went to work fixing his mistakes.

  Those who had borne the brunt of Hastings’s sloppy attempts to bury his wrongdoings—the mass firings of loyal longtime executives and the attempts to deprive the story of oxygen by refusing to discuss it with reporters—wondered if Hastings had lost his vision, and Netflix, its relevance.

  “It was arrogant and it spent every last cent of goodwill Netflix had deposited in the bank and was well into deficit spending mode,” Ken Ross later reflected.

  The financial press and bloggers vented their frustration at Netflix’s silence in a raft of negative stories about the company’s struggles to renew important streaming deals that expired in 2011. As its share price dipped below $60, Wall Street joined the chorus of doom with talk of a takeover, possibly by Amazon or Microsoft.

  Financier Carl Icahn circled the company like a shark, biting off chunks of stock here and there until he had accumulated a 10 percent stake. As he had done years earlier with another home entertainment giant, Icahn spoke of management changes.

  What appeared to be the apocryphal demise of another pioneering tech company, whose model was adopted by rivals and perfected beyond its ability to compete, turned out to be another painful but necessary transformation for Netflix.

  Gone was the scrappy, iconoclastic underdog beloved for its meticulous attention to a highly personalized “customer as hero” experience—DNA that Netflix inherited from Marc Randolph.

  In its place, Hastings and his team erected a monolithic, mainstream corporation whose mission was to offer the best online movie watching experience at the best price. Period. And, so far, that’s enough for consumers.

  “The brand lost a lot of its luster because of all of it . . . but we are sort of a bottom-line culture,” Ross said. “We don’t have to be the darling. We are the way you watch movies.”

  The “customer as hero” approach won Netflix tremendous loyalty early in its struggle to reach mainstream users. The post-Qwikster shift to a “product as hero” approach—showcasing Netflix’s seamless and ubiquitous streaming technology and expanding content library—plays to Hastings’s strengths as an engineer and downplays his chronic lack of understanding of consumer sentiment.

  To resurrect his company, Hastings aimed his team’s considerable computer engineering and marketing skills, as well as the Netflix Web site’s data-collection capabilities, at improving the product—both the content and the technology—as a means of reconnecting with consumers.

  Certain that a better content selection could win back his customers, Hastings created a new marketing team headed by former Warner Bros. home video chief Kelly Bennett to cut deals for the movies and TV shows that Cinematch told them subscribers wanted.

  The fifteen years’ worth of data that the Web site had collected not only told the story of how the online movie rental business had developed, it also allowed Netflix to predict with a great degree of accuracy where the industry was going.

  By watching those whorls and patterns develop over time, Netflix’s content acquisition team was far better prepared than competing services to identify trends in consumer tastes, and it tailored the catalog accordingly. For example, the data revealed an emerging trend—“binge viewing,” or watching multiple episodes of a TV series in one sitting. It also caught a rising demand by subscribers for children’s programming, and Ted Sarandos stocked up accordingly, cutting deals with Nickelodeon, DreamWorks Animation, and the Walt Disney Co.

  Increasingly, those algorithmic insights conflicted with conventional wisdom about consumer behavior.

  Cinematch showed the Netflix team that while subscribers expected a healthy movie selection, they actually watched TV series more. Despite taking a hammering in the media for failing to renew a deal with Starz for new-on-cable movies, Netflix found that TV shows aged better, with “water cooler talk” fueling demand for old shows and little-known gems that were still airing.

  Following the data made good economic sense, too: Each TV series produced tens of hours of viewing compared to the two or three hours for each film—resulting in greater rates of subscriber usage and satisfaction.

  As a result of this demand, Netflix reassembled the cast of Arrested Development for a fourth season and used it to lure viewers who had loudly complained when the FOX network canceled it in 2006.

  As streaming grew, movie studios began dropping exclusive deals and demanding that Netflix and other services buy titles in bulk rather than choosing what they knew would resonate with viewers.

  These factors played into a massive reshaping of Netflix’s catalog in 2011 that made Sarandos, Bennett, and Hastings take another look at a business the company had tried and abandoned years earlier—producing exclus
ive content.

  Netflix’s Red Envelope Productions, formed in 2004, had backed small independent filmmakers and had purchased a number of inexpensive titles from film festivals that it had promoted to audiences selected by Cinematch. The business was shuttered in 2009 after Hastings determined it was distracting his team from their primary goal of acquiring subscribers. The company had ventured into content creation two years later with The Sopranos clone Lilyhammer, but the next project had to be of a different magnitude.

  Netflix’s competitive landscape now included cable companies that rightly considered the online rental company as a dangerous rival. While Netflix still could not match the cable companies’ access to first-run movies; its cheap, all-you-can-eat subscription plan, growing content catalog, and “watch anywhere” capability was encouraging “cord cutting” among cable customers frustrated with their tiered channel plans.

  But in the battle to convince subscribers to return to Netflix, the competitive environment and Cinematch data showed the company had to take a big risk and produce its own exclusive content.

  To Hastings, this fulfilled a “virtuous circle” for Netflix: better content meant more subscribers; more subscribers meant more money for better content.

  Netflix had to reach into the ranks of cable subscribers and take on aspects of premium cable channels like HBO and Showtime to tip their subscribers into Netflix’s camp. To achieve this, the productions had to be first class.

  Among the projects under consideration was a remake of a British TV series called House of Cards set in the U.S. Congress, brought to Netflix by director David Fincher and actor Kevin Spacey.

  Data showed that while Netflix subscribers did not often go looking for Spacey’s films, once they discovered the actor they often went on to watch all his work. Fincher’s films, including The Curious Case of Benjamin Button, The Social Network, and The Girl with the Dragon Tattoo, shared the same attribute. The original British series had also captured a healthy share of Netflix users.