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Ophelia Gurin
Last week, we heard the revelation that Netflix lost 1 million Spanish users due to account-sharing curbs. It made many doubt the wisdom of the move. But looking at the data, losses should have been much higher!
Spain has 2.5 people per household, so the 333,000 users that left may represent 150,000 homes or less. Since there are about 5 million Netflix subscribers in Spain, the company lost roughly 3% over the new policy.
But losses might have been lower than that. Kantar also says that 4% of 18.7 million Spanish households obtained a new streaming subscription in the first quarter. Out of these, Netflix captured 6.6%, some of which were likely former credential sharers. In other words, Netflix added 50,000 subscriptions for a net loss of 100,000 or 2%.
Netflix says that globally 100 million households are using credentials borrowed from someone else to access the service. So, of all the households accessing Netflix, 30% are not paying for it. If Spain is anywhere near the global average, 7 million Spanish homes access Netflix, of which 2 million do not pay. Those 2 million homes represent 4-5 million people, all likely accessing Netflix through the main television in the home.
It also shows the potential benefit to Netflix in introducing account-sharing controls. If the company captures just 10% of 2 million sharing Spanish households, it will add 200,000 new subscribers or extra location upgrades.
The US has about 67 million paying Netflix homes, and if it conforms to the global average number of sharers, an additional 30 million homes access for free. The 97 million homes using Netflix translate to 200 million users. If 7% of them leave, as in Spain, Netflix could see as many as 15 million fewer users within a month or so of introducing account-sharing curbs.
Colin Dixon created nScreenMedia as a resource to the digital media industry as it transitions to the new infrastructure for multi-screen delivery. He brings a wealth of knowledge on digital TV, over-the-top, and IPTV markets garnered from his 20+ years working in those industries. Before founding nScreenMedia, he spent seven years as an analyst and partner with The Diffusion Group. Previously he held senior executive positions at Microsoft/WebTV, Liberate, and Oracle, delivering products and services to the cable, satellite, and IPTV industries.
Dixon is the author of many reports, opinion pieces, and classes, including Getting to Grips with FAST: a Primer on Free Ad-Supported Streaming TV. He holds bachelor's and master's degrees in electrical engineering and has post-graduate business education experience from Stanford.
Jonathan Friedland, the new vice president of global corporate communications who had joined Netflix just a few months earlier, asked whether customers on tight incomes might object to the price hike, according to people at Hastings' meeting. Hastings argued that Netflix was a great bargain. He said he knew that some customers would complain but that the number would be small and the anger would quickly fade.
Hastings was wrong. The price hike and the later, aborted attempt to spin off the company's DVD operations enraged Netflix customers. The company lost 800,000 subscribers, its stock price dropped 77 percent in four months, and management's reputation was battered. Hastings went from Fortune magazine's Businessperson of the Year to the target of Saturday Night Live satire.
To Hastings' credit, what he wanted to do made sense. The DVD's best days are behind it. Video streamed via the Internet is slowly replacing the physical disc, and betting a business on a dying product is never a great idea. So Hastings wanted to get ahead of the curve and focus on streaming, to disrupt his own business before someone else did it for him. It was aggressive, far-sighted, and very much in character.
Hastings is someone who knows a thing or two about disrupting businesses. Netflix, after all, is the company that drove the giants of video rental out of the sector with a simple premise: A simple-to-use Web site that delivers DVDs right to your doorstep. Best of all: No late fees. He became one of those executives with the "visionary" label, who can predict where a market is going before it happens, and was asked to join the board of directors of two of the most important companies in tech, Microsoft and Facebook.
Leading up to the first anniversary of the Netflix meltdown, CNET interviewed former and current Netflix employees to find out how a series of missteps turned into a lost year, and whether it has rebounded from those self-inflicted wounds. Most asked to remain anonymous. Netflix declined to comment for this story.
So how did Hastings stumble? Just prior to the attempt to remake Netflix into a streaming-video distributor, there was turmoil in the company's executive offices. Several of Hastings' most trusted lieutenants were no longer as influential with the CEO. Others had left and their replacements did not yet have the clout to convince Hastings he was being too aggressive for a customer base that by 2011 could hardly have been considered on the bleeding edge of consumer tech.
When customers and the press pushed back, the Netflix response was haphazard, culminating with an amateurish, confusing YouTube video heralding the coming of Qwikster, the spinoff that was supposed to be a life raft for Netflix's DVD operations. The Qwikster plan was scuttled three weeks after it was announced.
"Whatever happened to Fortune's Businessperson of the Year?" asks Wedbush research analyst Michael Pachter, referring to one of the many honors Hastings received in 2010. "Whatever happened to the guy who was invited to the boards at Facebook and Microsoft? What happened to that guy? Do you think Facebook would have invited him to their board now?"
Hastings has an unwavering belief that streaming video represented the future of home entertainment. He argued that in times of technological advancement companies that had succeeded at one business often clung too tightly to tradition and to what had made them successful. And then they were toast. He didn't want that to happen to Netflix. While few people disagree with that assessment, some within Netflix doubted Hastings' assessment of how quickly Netflix needed to shift to streaming.
But Hastings pressed ahead. Around March 2011, he took his plan to his executive team and then to the company's vice presidents. Some of the execs who heard Hastings talk about spinning off Netflix's DVD operations into a new company, referred to internally as DVD Co. and later Qwikster, left the meeting thinking Hastings was only considering the idea.
That impression was quickly corrected. Within about 72 hours, some of the group learned that Hastings had already offered the new company's CEO position to Andy Rendich, Netflix's respected chief service and operations officer. Hastings, it appeared, wasn't looking for debate.
Netflix rapidly began executing the plan. Some employees were stunned by how quickly and unemotionally DVD operations, the backbone of the business for a decade, was split off from the company. DVD Co. was moved out of Netflix's offices to a space a few blocks away. Netflix's leaders stopped discussing DVDs. Those Netflix executives who moved to DVD Co. stopped attending Netflix management meetings. Some of those people included Allison Hopkins, Netflix's vice president of human resources, Liz Coddington, vice president of financial planning and John Robison, vice president of DVD product development.
Few people who had worked for Netflix for any length of time were surprised that there wasn't more discussion about the plan. As Netflix's business blossomed and as he was personally applauded in the press, Hastings had grown much more confident in his own decision making, less receptive to taking advice from his senior management team. What's more, few of the people who could persuade Hastings or tell him he was making a mistake were around anymore.
Hastings co-founded Netflix in 1997 and eventually assembled a seasoned management team that he kept largely intact for a decade at the Los Gatos, Calif., company. The competition and long odds united them. In 2004, when the battle against industry heavyweight Blockbuster was at its fiercest, former CFO Barry McCarthy almost left. A 30-year veteran in finance, McCarthy decided to stay and joked with coworkers that "you don't walk out on friends in the middle of a knife fight."
After Hastings, the two most influential voices at the company were McCarthy and Leslie Kilgore, at the time Netflix's chief marketing officer. Smart, experienced and aggressive, they were the people who could challenge Hastings' ideas.
But in December 2010, after nearly 12 years at Netflix,McCarthy left the company following a conflict about his role and his compensation. For a while, McCarthy, who is now an executive adviser at venture capital firm Technology Crossover Ventures, chafed that Hastings refused to expand his responsibilities, sources said.
The large pay raise for Sarandos was indicative of how Netflix was evolving. The company was headed to a streaming-video future, and obtaining Web rights for movies and TV shows is tricky. Where once Netflix could obtain discs from a plethora of wholesalers and retailers -- even when Hollywood refused to supply the company with DVDs -- there were few ways around the studios when it came to streaming rights. Sarandos had the Hollywood relationships, and his solid gold Rolodex was very valuable to Netflix.
McCarthy was livid, said the sources, and he went to Hastings to discuss his salary. The two men worked on finding a compromise but the damage was done. McCarthy handed in his resignation and within two days Hastings replaced him with David Wells, Netflix's vice president of financial planning and analysis. The same day McCarthy cleared out.
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