Netflix’s surreal strategy

Fact: Margins at the DVD business are expected to be around 50 per cent next quarter, and account for four-fifths of domestic profit. Margins for streaming are at about 8 per cent.

Strategy: Heavier focus on streaming.

Netflix CEO explanation

Price change and service changes in quick succession… and the ensuing customer dissatisfaction.

An excellent current-events case to bring to the classroom.

via the netflix blog:

I messed up. I owe everyone an explanation.

It is clear from the feedback over the past two months that many members felt we lacked respect and humility in the way we announced the separation of DVD and streaming, and the price changes. That was certainly not our intent, and I offer my sincere apology. I’ll try to explain how this happened.


Netflix throttling

[F]or a company like NetFlix, frequent customers are less profitable than other users. NetFlix customers who return their movies more quickly, require more service, and incur additional shipping costs, reducing profitability. Each DVD mailed and returned costs the company 78¢ in postage alone. There are other processing, handling, and breakage costs as well.

So what does NetFlix do? They use a poorly named “fairness algorithm” to slow down deliveries to heavy users, preventing them from watching, returning, and ordering even more movies. By reducing interactions with these customers, NetFlix reduces its costs and increases its profits. This is the kind of bottom line thinking that makes accountants proud.

Here’s the problem: NetFlix’s heavy users are also their most likely heavy promoters. (Brand Story)

Netflix to employees: Take as much vacation as you want

Employees at the online movie retailer often leave for three, four, even five weeks at a time and never clock in or out. Vacation limits and face-time requirements, says Netflix Chief Executive Reed Hastings, are “a relic of the industrial age.”

“The worst thing is for a manager to come in and tell me: `Let’s give Susie a huge raise because she’s always in the office.’ What do I care? I want managers to come to me and say: `Let’s give a really big raise to Sally because she’s getting a lot done’ – not because she’s chained to her desk.” (San Jose Mercury News)