With DreamWorks Deal, Netflix Makes The Haters Reconsider

Netflix's unveiling this week of content deals with DreamWorks, Discovery Channel, and Animal Planet, among others, are early signs of proof that growing pains are a small price to pay for growth.

Reed Hastings knows where you keep your DVDs. They are sitting in a drawer in your media room--right next to the 8-tracks. Reed Hastings also knows that for every bygone relic of our technological past, there is a shuttered company that once dominated the market for it. From Blockbuster to Borders to Tower Records, the annals of corporate history are littered with the skeletons of businesses that saw change coming, but failed to capitalize on the next big thing.

Hastings is reading the tea leaves, and he’s not about to let Netflix go down that same path to irrelevance. Are customers and investors up in arms over the company’s decision to split its DVD and streaming services into two stand alone entities and the prices increases that are making it possible? For now, they are. But those 600,000 customers who cancelled subscriptions (still only about 2 percent of Netflix’s current customer base) and those reactionary investors driving a 50 percent loss in market capitalization are doing precisely what Hastings is not. While they take the short view, Hastings is thinking long-term. He’s not focused on the next quarter; he’s focused on the next quarter century.

Hastings is willing to deal with a little short-term pain for the lasting returns reaped when businesses not only embrace change, but drive it. Video streaming is the future. DVDs are the past. As the “now generation” comes of age in every corner of the globe, Netflix will seek to do the same. Along the way, it will likely introduce older generations to home entertainment options they would have been reluctant to try were they not housed under the familiar Netflix brand.

This week’s unveiling of content deals with DreamWorks, Discovery Channel, and Animal Planet, among others, are laying the foundation for Netflix to fundamentally alter the movie and TV streaming business in the same way it revolutionized DVD rentals. Within a few years, Netflix plans to be able to provide access to a nearly limitless content library with new levels of speed and convenience that should give cable TV a run for its money. (And by the way, apart from bundling channels and pricing itself at 10 times the cost of Netflix, how is cable evolving to stay relevant?) Also, a sole focus on streaming content means the company can grow beyond the confines of the U.S. market and develop a truly global reach.

If Apple did it for music, why can’t Netflix do it for movies?

At the same time, those older U.S. consumers who may still just be learning to program their DVD players will be provided the same industry-leading service they’ve grown accustomed to via spinoff Quickster--and with a number of enhancements that Hastings has promised in short order. It may only be a five or ten year business model, but it provides a profit stream to a buggy whip platform.

So why all the uproar?

Hastings himself has admitted that he didn’t communicate the benefits of his plan as well as he should have at the outset--and that much is obvious. But the larger misstep here is that Hastings assumed his zest for change would be shared amongst stakeholders in the consumer and investment spaces. With change inevitably comes inconvenience and uncertainty--the two things that consumers and investors dread most in today’s marketplace. Hastings underestimated just how much and how long it takes for people to adapt. Frederick Douglas was right that there is no progress without struggle.

Still, there are signs that the marketplace is already starting to catch up to Hastings’ vision. Some in the financial press are already positing that Netflix stock is currently priced as a bargain. A quick Google search of blog headlines indicates that the public is warming to Netflix’s strategy with every new piece of information we learn about it. The content deals already inked--as well as those in the works--communicate industry confidence in the company’s direction.

As the narrative changes course, Netflix will regain those 600,000 subscribers and many more, sooner rather than later. With each new content deal, it will increase its power to make more deals with Hollywood at prices it prefers and offer a service that competes with cable at a fraction of the price.

Even when market forces dictate that change is necessary, it’s never easy. But in the end, Netflix may very well become a case study in why growing pains are a small price to pay for growth.

Richard S. Levick, Esq., is the President and Chief Executive Officer of Levick Strategic Communications, a crisis and public affairs communications firm. He is the co-author of The Communicators: Leadership in the Age of Crisis and Stop the Presses: The Crisis & Litigation PR Desk Reference, and writes for Bulletproofblog. Mr. Levick is on the prestigious list of “The 100 Most Influential People in the Boardroom,” which is compiled by the NACD and Directorship Magazine. Reach him at rlevick@levick.com or connect with him on Twitter @richardlevick.

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[Image: Flickr user jdlasica]

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