No Grand Gestures

· Joanthan Poritsky

There’s plenty to talk about in yesterday’s earnings letter from Netflix (embedded below). The big number is 810,000, the amount of subscribers the company lost last quarter. The shareholders’ letter is grim, repeatedly referring to the recent customer exits as a “wave”. The language sounds as though the company is bloodied and limping towards a revival. The starkest line, in my view, is this:

In the U.S., we’ll build back our brand the same way we built it in the first place: no grand gestures, just amazing service day‐after‐day, for an incredibly low price.

Build back? This is not the language of, as is the company’s stated aspiration, the “best streaming video subscription service on the planet.” Their stock is plummeting, customers are exiting en masse and new competitors are cropping up. Is this the end of Netflix? Not exactly.

There is a silver lining for the company. Domesitc revenues were up year-over- year, as were their profit margins compared to the last quarter. The reason? Less DVD shipments and, of course, the increased price of DVD-only plans. In other words, their goal of being the best streaming service is meetable; DVD and Blu-Ray seekers are marginal. If physical discs are your preferred method of watching films, Netflix doesn’t care about you anymore.

I know this specifically because of this “no grand gestures” line. I have said before CEO Reed Hastings should have dealt with this issue more like Steve Jobs dealt with the iPhone 4 “antenna-gate”; with a sweeping good-will deed (free bumpers!) that made customers content enough to stick around. Though Netflix’s letter has a plain-spokenness to it, there are also bits that sound delusional. The above “incredibly low price” is a start, but elsewhere they complain of being perceived as “greedy” in light of the price increase. The problem, Hastings asserts, is that they did a poor job of explaining the pricing changes.

The letter is also dubious about the threat of competition:

Our $7.99 pricing is a full 20% lower than our nearest unlimited DVD‐by‐mail competitor, and our service is better because we have more distribution centers and, as such, faster delivery.

They are right about the leg-up on delivery speed, but the pricing comparison with (I assume) Blockbuster is misleading. Yes, Blockbuster’s cheapest plan is $9.99 a month, but it includes Blu-ray discs and videogames. The monthly price for a single unlimited Blu-ray plan from Netflix? $9.99.

As a Netflix customer I have this much to say to Reed and CFO David Wells: you are wrong. The time for chest-thumping bravado is over. We have had nothing but excuses since you announced the price increase this summer. People aren’t leaving because of a botched e-mail, it’s because you have proven that there is a wide swath of customers you have no regard for. We are waiting for you to make a move that says you are not abandoning lovers of physical discs, which is to say lovers of library completeness and audiovisual quality. We are all waiting for that grand gesture. Until we can’t wait anymore.

[Netflix Investor Letter Q3 2011]( Investor-Letter-Q3-2011)