Common Sense: Netflix Chief Looks Back on Its Near-Death Spiral

It was the thousands of e-mails that poured in from angry and disappointed customers.

“I realized, if our business is about making people happy, which it is, then I had made a mistake,” Mr. Hastings told me this week, in a rare public comment on an episode that could have destroyed the company. “The hardest part was my own sense of guilt. I love the company. I worked really hard to make it successful, and I screwed up. The public shame didn’t bother me. It was the private shame of having made a big mistake and hurt people’s real love for Netflix that felt awful.”

This week, Netflix announced that it gained three million subscribers globally in the first quarter and that revenue for the quarter exceeded $1 billion, a record for the company. On Tuesday, the stock jumped 22 percent, the first time it has traded over $200 since the Qwikster episode, and it is up 135 percent so far this year, making Netflix the best-performing company in the Standard Poor’s 500-stock index. The company is basking in the critical glow of its original series, “House of Cards,” and this month narrowly surpassed HBO in total subscribers.

In the annals of corporate missteps, there are few parallels to such a rebound from what once looked like a death spiral, especially in the momentum-driven world of technology. Zynga, the online game maker, and Groupon, the Internet coupon company, are struggling with brutal competition. In an old-economy industry like retail, J. C. Penney was in the midst of a similarly bold attempt to reposition the company when it fired its chief executive, and is now fighting to survive.

How did Netflix simultaneously manage both a fundamental transformation of the company and a public relations disaster?

Mr. Hastings said he realized that the company’s attempt to both raise prices and separate into two companies, one the legacy DVD-by-mail business and the other the up-and-coming broadband streaming business, was trying to do too much too fast. Angry subscribers abandoned the company in droves (800,000 in the fourth quarter of 2011 alone), revenue missed estimates and the stock plunged.

“I messed up,” Mr. Hastings wrote in an unusually forthright September 2011 blog post. Citing the precedents of AOL and Borders Books, which struggled or failed to make the digital transition, “my greatest fear at Netflix has been that we wouldn’t make the leap from success in DVDs to success in streaming.” But in the rush to accelerate the transition, he wrote, “In hindsight, I slid into arrogance based upon past success.” He also made a video apology.

Mr. Hastings said he didn’t expect the apology alone to “turn it around,” adding, “I wasn’t naïve enough to think most customers care if the C.E.O. apologizes, but I thought it was honest and appropriate.”

The mea culpa resonated, though, with some important constituencies, including some Wall Street analysts, who were punishing the company’s stock. Richard Greenfield, an influential media analyst at BTIG, said that he was impressed that Mr. Hastings “realized his mistakes and openly admitted them.”

“He dusted himself off, stood back up and started running,” Mr. Greenfield said. “Very few people can do that.”

Still, Mr. Hastings said, “The situation made me nervous and very focused.

“I couldn’t say with confidence that we’d recover. We were in a place that was quite risky. We didn’t have the reserves to make a second stumble.”

On the other hand, he didn’t panic, and he didn’t lose confidence. Although he made some big changes, like scrapping Qwikster, he never questioned his original vision for the company, which he helped found in 1997. Nor did he lunge at supposedly transformative opportunities that were pressed upon him — a lesson he learned from a four-year war with Blockbuster that began in 2004, when Blockbuster, then the dominant and much larger DVD distributor, tried and failed to crush its upstart competitor.

“There were elements of panic in my reaction back then,” Mr. Hastings said. “We got desperate and we did some dumb things.” (He cited online advertising on the Web site; starting Red Envelope, an independent film producer and distributor, since shut down; and buying DVDs out of the Sundance Film Festival.) “After we eventually won the Blockbuster battle, I looked back and realized all those things distracted us. They didn’t help, and they marginally hurt. The reason we won is because we improved our everyday service of shipping and delivering. That experience grounded us. Executing better on the core mission is the way to win.”

Article source: http://www.nytimes.com/2013/04/27/business/netflix-looks-back-on-its-near-death-spiral.html?partner=rss&emc=rss