Stock Prices Tied to Customer Experience; Netflix


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As a Customer Experience leader, I am regularly asked for proof that customer experiences are tied to a company’s finances. Netflix could not be a better example of this very issue.

Netflix has recently learned a painful public lesson about the power of customers, and ensuring that all customer experiences are brand-aligned and relevant. Netflix and its Officers also learned a lesson in the reality of risk management, reputation management, economic conditions, being out of touch, not using lag indicators as a future predictor, and how important their Annual Report really is.

Take from section 1A of their February 18, 2011 10K/Annual Report, I quote…

If any of the following risks actually occurs, our business, financial condition and results of operations could be harmed. In that case, the trading price of our common stock could decline, and you could lose all or part of your investment.

Risks Related to Our Business
If our efforts to attract and retain subscribers are not successful, our business will be adversely affected.
We have experienced significant subscriber growth over the past several years. Our ability to continue to attract subscribers will depend in part on our ability to consistently provide our subscribers with a valuable and quality experience for selecting and viewing TV shows and movies. Furthermore, the relative service levels, content offerings, pricing and related features of competitors to our service may adversely impact our ability to attract and retain subscribers. Competitors include MVPDs with free TV Everywhere and VOD content, Internet movie and TV content providers, including both those that provide legal and illegal (or pirated) entertainment video content, entertainment video retail stores and DVD rental outlets and kiosk services. If consumers do not perceive our service offering to be of value, or if we introduce new or adjust existing services that are not favorably received by them, we may not be able to attract subscribers.

In addition, many of our subscribers are rejoining our service or originate from word-of-mouth advertising from existing subscribers. If our efforts to satisfy our existing subscribers are not successful, we may not be able to attract subscribers, and as a result, our ability to maintain and/or grow our business will be adversely affected. Subscribers cancel their subscription to our service for many reasons, including a perception that they do not use the service sufficiently, the need to cut household expenses, availability of content is limited, DVD delivery takes too long, competitive services provide a better value or experience and customer service issues are not satisfactorily resolved.

We must continually add new subscribers both to replace subscribers who cancel and to grow our business beyond our current subscriber base. If too many of our subscribers cancel our service, or if we are unable to attract new subscribers in numbers sufficient to grow our business, our operating results will be adversely affected. If we are unable to successfully compete with current and new competitors in both retaining our existing subscribers and attracting new subscribers, our business will be adversely affected. Further, if excessive numbers of subscribers cancel our service, we may be required to incur significantly higher marketing expenditures than we currently anticipate to replace these subscribers with new subscribers.”

Started in 1997 and going public in 2002, Netflix states on its website that it has 25 million US and Canadian subscribers. Initial stock price was approximately $8.00 per share in 2002 and traded at a high of $241.88 on August 31, 2011. Clearly, Netflix executives believe that subscriber growth and customer satisfaction have both contributed to their share price increases. Customers are generally happy, word of mouth is favorable, repeat business is occurring, and shareholders are happy.

Good job, Netflix. Your Officers are rewarded generously for favorable business results – although ISS (Institutional Shareholder Services) rates Executive Compensation as a GRI rating of High Concern.

Stock graph from Netflix’s Investor Relations webpage.

Item 7 of the 10K/Annual Report goes on to say

Management’s Discussion and Analysis of Financial Condition and Results of Operations

With 20 million subscribers as of December 31, 2010, we are the world’s leading Internet subscription service for enjoying TV shows and movies. Our subscribers can instantly watch unlimited TV shows and movies streamed over the Internet to their TVs, computers and mobile devices and, in the United States, subscribers can also receive DVDs delivered quickly to their homes.

Our core strategy is to grow our streaming subscription business within the United States and globally. We are continuously improving the customer experience, with a focus on expanding our streaming content, enhancing our user interfaces, and extending our streaming service to even more Internet-connected devices, while staying within the parameters of our operating margin targets.

By continuously improving the customer experience, we believe we drive additional subscriber growth in the following ways:

  • Additional subscriber growth enables us to obtain more content, which in turn drives more subscriber growth.
  • Additional subscriber growth leads to greater word-of-mouth promotion of our service, which in turn leads to more subscriber growth at an increasingly cost-effective marketing spend.
  • Additional subscriber growth enables us to invest in further improvements to our service offering, which in turn leads to more subscriber growth.

The following represents our performance highlights for 2010, 2009 and 2008:


It is abundantly clear that Netflix considers their customers as their number one priority and for good reason. Yet, Netflix announced a price increase in July 2011 and on September 18 the introduction of two separate entities to handle DVDs and Streaming; both causing customer outrage. Maybe they only value their Streaming customers as they do say that this is their “core strategy”.

It is also abundantly clear that Netflix thoroughly understands their competitive landscape along with associated risks, and has for some time (please read the entire 10K for details).

June 1 close $267.26/share, July 1 close $267.99/share, August 1 close $263.38/share, September 1 close $233.27/share, and today’s close at $111.05/share. Ouch!

Netflix CEO, Reed Hastings is quoted in a September 18 blog post saying “I slid into arrogance based on past success,” which essentially means he did not take the current state of the economy and his customers’ mood into consideration before approving customer impacting changes. After all, other companies migrate customers from one service to another by overpricing the undesirable service and then making it inconvenient to use that same service. Initial customer complaints get handled by customer service, stock might take a minor hit (but probably not), customers begrudgingly move to the new service, and life goes on.

In an e-mail today, Hastings is also quoted as saying “Consumers value the simplicity Netflix has always offered and we respect that. There is a difference between moving quickly — which Netflix has done very well for years — and moving too fast, which is what we did in this case.” Right… (cough). Not a great way to say “We f**cked up, we’re out of touch, and we’re sorry” which would have had much more integrity, but I digress.

The price increase remains in effect and the new DVD program called Qwikster is jettisoned. Will that make customers happy? I doubt it. Economic conditions remain poor and most consumers are fed up (anyone following Occupy Wall St.?), so once a customer finds a better alternative with less hassle, they are gone.

But what’s the real reason Netflix even considered going down this path in the first place? In one word… Competition.

According to a September 19 article on MSNBC’s website,

” ‘Netflix was basically a monopoly in the streaming business until about six months ago, and the effect was that content providers were underpricing their products.’ said Charlie Wolf, an analyst who covers the company at Needham. On February 22nd, Amazon announced that it would stream 5,000 movies and television shows at no additional charge to customers who signed up for a Prime membership, which costs $79 a year.

Wolf said that increased competition among streaming companies meant that the balance of power was tipping back to the movie studios and networks that produce entertainment. These companies can now play Netflix and its competitors off of one another, creating higher profits for themselves and forcing streaming companies to raise their prices or cut into their margins. Netflix recently lost its license to stream popular movies from Starz Entertainment over a dispute over fees.

Streaming isn’t the only aspect of Netflix’s business that is coming under fire. It’s traditional DVD business is also being challenged by Redbox, a division of Coinstar Inc. that rents DVDs at 33,330 kiosks in supermarkets and other retailers. Coinstar’s stock is up 6 percent over the last six months, compared with a 32 percent drop for Netflix.”

(Note – in this case, I interpret Mr. Wolf’s comments as not meaning that Netflix was or is a true monopoly; the only company offering this product/service in the market. I believe that he means that Netflix was the market Gorilla, leveraging large volumes of customers and viewership to keep vendor prices down, very much like Wal-Mart or Home Depot.)

The Bedford Report also indicates that Blockbuster is now again poised to seriously challenge Netflix with Dish’s recent introduction of the Blockbuster Movie Pass.

So what does this all mean? Here’s how I see it.

When the competition gets serious, the usual path companies go down is to PANIC! Throw the customer overboard, ignore your Annual Report (which is a commitment to your shareholders by the way), ignore vision and mission statements, ignore commitments to service, implement a price increase, and spin-off or shut down a company or product line that isn’t as profitable as it was in the past (the DVD business?) so that stock prices can remain high.

Accomplish this by raising prices and making the offending business difficult to use so that customers naturally defect, hire a PR firm to crank out positive messaging, and the company now has the time and revenue to create new products and services (or sue their competitors to get more revenue and/or keep the competition at bay). Say what you will, but this path is usually effective.

I believe that this is a wake up call to every CxO out there, that business as usual is not going to work and that everyone MUST keep the customer at the center of every decision made. You can not write in an Annual Report that customers are everything and then treat them poorly by making decisions without fully understanding their needs – no matter what the pressing issues are that you face. We now live in a transparent world where customers are much more informed and savvy than at any other time in known history and where you will be kicked to the proverbial curb in nano seconds for unbecoming behavior.

I also believe that this is a text-book example that will be cited often, clearly illustrating that customer experiences are directly tied to stock prices. And, that organizational decisions are rewarded or punished quickly. For example, a CxO’s compensation is tied to stock prices, so in this case Mr. Hastings and his Officers all lost +/- 50% of their annual compensation during these past two months.

Case closed. Would love to hear your thoughts on the topic of customers and stock prices!!!

Republished with author's permission from original post.


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