Netflix: The Customer Strikes Back Custom Case Solution & Analysis

Evidence Brief: Netflix: The Customer Strikes Back

1. Financial Metrics

• Stock Performance: Share price declined from a high of approximately 300 USD in July 2011 to under 80 USD by October 2011.
• Subscriber Loss: Reported a loss of 800,000 subscribers in Q3 2011 following the pricing and branding announcements.
• Pricing Change: Shifted from a 10 USD monthly bundle (DVD + Streaming) to two separate plans costing 7.99 USD each, representing a 60 percent price increase for customers retaining both services.
• Market Valuation: Market capitalization lost over 12 billion USD in value within four months.
• Content Costs: Negotiating renewals for streaming rights showed significant inflation; notably, the Starz deal ended after Netflix refused a 300 million USD annual renewal fee.

2. Operational Facts

• Qwikster Launch: Announced the rebranding of the DVD-by-mail business as Qwikster, requiring separate websites, separate billing, and separate ratings databases from Netflix streaming.
• Infrastructure: Maintained approximately 50 DVD distribution centers across the United States.
• Content Library: DVD library included approximately 100,000 titles; streaming library was significantly smaller and subject to licensing expirations.
• Communication: CEO Reed Hastings issued a blog post and email apology on September 18, 2011, which focused on the failure to explain the price change rather than the price change itself.

3. Stakeholder Positions

• Reed Hastings (CEO): Positioned the split as a necessary move to prevent the DVD business from slowing down the streaming business. Stated that companies rarely die from moving too fast, but frequently die from moving too slowly.
• Netflix Customers: Expressed significant hostility via social media (over 25,000 comments on the apology blog post). Primary grievances included the 60 percent price hike and the inconvenience of managing two separate accounts.
• Investors: Shifted from growth-oriented valuation to skepticism regarding management judgment and churn management.
• Content Providers (e.g., Starz): Leveraged Netflix subscriber growth to demand higher licensing fees, viewing Netflix as a competitor to traditional cable rather than a secondary distribution channel.

4. Information Gaps

• Churn Granularity: The case does not specify the percentage of lost subscribers who were DVD-only versus hybrid (DVD + Streaming) users.
• Competitor Acquisition Costs: Data on how much Amazon Prime or Hulu spent to acquire the 800,000 defecting subscribers is absent.
• Internal Employee Sentiment: No data provided on morale or turnover within the DVD distribution centers during the Qwikster announcement.

Strategic Analysis

1. Core Strategic Question

• How can Netflix decouple its legacy physical business from its digital future without destroying the brand equity and customer convenience that fueled its initial growth?

2. Structural Analysis

Value Chain Analysis: The transition from DVD to streaming shifts the primary cost driver from logistics (postage, warehouses) to content acquisition (licensing fees). Netflix is losing its bargaining power as content owners recognize the platform as a threat to the traditional cable ecosystem. The Qwikster split adds unnecessary friction to the customer experience, effectively devaluing the service while increasing the price.

Ansoff Matrix: Netflix is attempting a market development strategy by forcing a transition to streaming. However, by treating the DVD business as a separate entity, they are abandoning the hybrid model that served as a competitive moat against pure-play streaming competitors like Hulu or Amazon.

3. Strategic Options

4. Preliminary Recommendation

Netflix must abandon the Qwikster brand and re-unify the user experience. The strategic error was not the price increase, but the destruction of convenience. A single website with a tiered pricing structure (Streaming Only, DVD Only, or Premium Bundle) allows the company to reach its financial goals without forcing customers to manage two distinct identities. The DVD business should be managed as a cash cow to fund the transition to original content, not spun off as a separate distraction.

Implementation Roadmap

1. Critical Path

• Phase 1 (Days 1-7): Immediate public announcement canceling the Qwikster brand. Issue a second, more direct apology that addresses the inconvenience of the split.
• Phase 2 (Days 8-30): Technical integration of the DVD and streaming queues back into a single user interface. Ensure a single sign-on and unified billing.
• Phase 3 (Days 31-90): Roll out tiered pricing. Introduce a grandfathered rate for the 800,000 lost subscribers to incentivize their return.

2. Key Constraints

• Technical Debt: Re-integrating the databases for ratings and queues that were prepared for the split will require 24/7 engineering focus.
• Content Licensing: The loss of Starz creates a content gap. Implementation success depends on securing a replacement mid-tier studio deal within six months.

3. Risk-Adjusted Implementation Strategy

The plan assumes a 15 percent recovery of lost subscribers within the first 90 days. If recovery stays below 5 percent, the company must pivot to an aggressive original content acquisition strategy to differentiate the streaming product. Contingency planning includes a 10 percent reduction in DVD marketing spend to offset the potential revenue shortfall from re-introducing bundled discounts.

Executive Review and BLUF

1. BLUF

Kill Qwikster immediately. The brand is the aggregator, not the delivery mechanism. The 60 percent price hike was a secondary grievance; the primary failure was the destruction of the unified customer experience. Netflix must re-integrate the DVD and streaming services into a single interface. Use the DVD business as a high-margin cash generator to fund the inevitable shift toward original content production. Failure to re-unify the brand will result in permanent subscriber churn and a terminal decline in market valuation as competitors capitalize on the friction Netflix created.

2. Dangerous Assumption

The analysis assumes that customers value the DVD service as a standalone product. Evidence suggests the value proposition was the combination of a deep back-catalog (DVD) and instant gratification (Streaming). Separating them removes the unique competitive advantage Netflix held over Amazon and Hulu.

3. Unaddressed Risks

• Content Inflation (High Probability/High Consequence): As Netflix attempts to fix the brand, content owners will continue to hike prices, potentially making the 7.99 USD streaming price point unprofitable within 24 months.
• Competitor Agility (Medium Probability/High Consequence): Amazon Prime may use this window of customer frustration to lock users into annual contracts, making the recovery of the 800,000 lost subs impossible.

4. Unconsidered Alternative

The team did not consider a sunset strategy for the DVD business. Instead of a split, Netflix could have announced a three-year phase-out of physical media, incentivizing users to switch to streaming-only through a series of declining discounts, thereby managing the transition through attrition rather than a sudden operational break.

5. Verdict

APPROVED FOR LEADERSHIP REVIEW