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Cost of Strategy

July 31, 2012

Reed Hasting’s ushered in the demise of one industry, movie rentals (DVD/DVR), with his strategy to increase customer convenience by eliminating the nuisance fees of late returns. Looking at the horizon through the technology window, the next irritant to remove from the customer experience is the act of walking to a mailbox, the hassle of looking for available titles, and then remembering to return the rental by post. At the same time, physical rentals increase business risk and open Netflix to agile competitors without the burden of infrastructure. 

A little more than one year ago, on July 12, 2011, Netflix CEO Reed Hastings announced a new pricing model separating its streaming service from DVD-rentals. The combined subscription that had previously cost $9.99 was split into two separate plans at $7.99 each. The pricing reform was followed by public outcry over what was effectively a 60% price hike for subscribers of both services. Hastings insisted that the change was necessary to ensure his company’s future success, but Netflix’s stock began tumbling nonetheless. To make things worse, Netflix announced in September that it would spin-off its DVD business into a newly-formed company called Qwikster, only to discard the plan a few weeks later. This episode did not fare well with customers and investors alike and by the end of the year Netflix’s share price was down more than 70%. 

Now Mr. Hasting’s is using the opportunity to expand infrastructure to deliver streaming videos internationally. An aggressive strategy. Mr. Hasting’s has proven he is not afraid to be decisive when there is an opportunity. Will it pay off in the long run? Porters analysis of Five Competitive Forces would help in forecasting a reasonable response. Since the 7.12.11 announcement, the market cap value has dropped $12.9 billion. Does anyone remember when you couldn’t find an Apple computer except in schools and hospitals? Does anyone remember when there was no software for sale to use on a Mac? Destructive innovation is costly upfront and if executed properly pays off handsomely.





From → business, Strategy

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