Reed Hastings: Netflix “Mispredicted” Its Transition To Streaming Service

Is your company facing an existential threat from a looming technology shift? If so, Netflix CEO Reed Hastings has some suggestions, like don’t forget about the customers you already have while figuring out how to attract new ones. Speaking today at the Code Conference in Rancho Palos Verdes, CA, Hastings said Netflix was too concerned with the wrong issues when it spun off its DVD-by-mail business in 2011 to focus on online movie delivery. “In hindsight, we were so focused on not dying with DVD,” he said. “We looked at all these businesses [with collapsing business models] like Kodak and Blockbuster. It was really a hard problem.”

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Netflix created a new unit called Qwikster for the DVD-by-mail business, while keeping online delivery under the Netflix name. People who still wanted both physical discs and streaming options had to set up a separate account for each. “It turned out it didn’t work out at all,” Hastings said. “We mispredicted a number of factors.” Like charging more to have both accounts. “It turned out that approach really annoyed customers,” the exec said. “We learned an important lesson: The fact that your company may not be strategically positioned for the next 10 years, [customers] don’t care about that.”

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What they care about is continuing to get the service they want, without unnecessary headaches. That the spinoff and price hike happened deep in the Great Recession made the situation even worse. “I became a symbol of The Man, screwing people during a recession,” Hastings said. “It came back as me being out of touch. If we had grandfathered [in prices for] everybody for two years, it might have been OK. That’s a mistake we’ll never make again.” And indeed, when the company recently announced a price hike, the $1 jump in the monthly fee affected only new streaming customers. Existing customers will be charged their same $7.99 per month for two more years.

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Now that the company has recovered from the misstep, with 48 million subscribers worldwide and share prices up a few hundred percent from 2011′s darkest days, Hastings said the company is past its “biggest strategic inflection point, so now we’re into how great can we be and getting a ton of shows and movies to offer everyone.” With a big lineup of new original programming that Hastings said “will completely dwarf everything we’ve had so far,” the company will rely on sophisticated analysis of viewer data to launch its shows to the right audiences. “Data is really fundamental for us about who to market the show to,” he said. “Not every show works for everybody. We’re going to promote it to people who love it. Think of it as a big matching system, and the variety of things we can do over the next five years [with that deep information base] is phenomenal.”

Hastings cautioned, however, that even Netflix has hit some limits on data-driven decision making. When the first episode of House of Cards was being tested, audiences rebelled over the difficult opening scene in which Kevin Spacey’s Frank Underwood strangles an ailing dog. Hastings told executive producer David Fincher that data showed that lots of viewers were clicking away from the show because of the scene. “He said, ‘Don’t ever tell me that again.’” The scene stayed in, and Fincher won an Emmy for directing it.

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