It’s amazing that we’re getting to watch so many case studies in the making, especially with the companies making the most amazing blunders. Borders, HP, and now Netflix.

It showed that Netflix so astoundingly doesn’t get it. Oh, they get that they have to evolve, they get that the DVD rental business is going to get smaller, and streaming is the future. Having been an exec at companies that were having to change their business model to survive, or die, I know it’s tough. What they don’t get, either now, or anymore, is it. Internal business models are important, cost structures that make you money are important, but the most important thing is your customers, and their satisfaction. In the case of industries in transition and with rising competition, customer loyalty cannot be underestimated. Netflix, in two steps, has put a huge divot in the loyalty they’d had with their customers. That’s a pretty amazing learning, not just for Netflix, but for other businesses to consider.

A likely scenario is that Netflix is caught in a situation where streaming content owners want to charge them fees based on the number of customers, not the number of actual streaming consumers, and since non-trivial number of their customers don’t stream, they don’t want to pay the fees for all customers. They also know that long-term, all content will be available for streaming, and then they don’t want to be in the DVD shipping business then. All good and valid business concerns, and why balancing all those plates simultaneously isn’t for wimps. But, talking to your customers in terms of different cost structures doesn’t make sense to them. You’re not going to expose the licensing details, that would be silly, but using it as an excuse for exposing your internal complexity to your customers is also not doing anything to benefit your customers. Thus the huge backlash Netflix is seeing online.

DVD pricing was easy, buy ’em in bulk, send ’em out, sell or wholesale them when you’re overstocked. Streaming is hard, content comes and goes based on providers whims and contract length and popularity and volume, and whatever else people think of pricing it on. It likely changes every time you talk to your providers. Rapidly changing, figuring it out in real time. Hard. But don’t expose that to your customers. Confuse customers, and they’ll leave, or be easy to pick off by your competition. You made your business on simplicity. No late fees, no trips to the video store. So. Easy. It’s not easy now.

I was one of the “1 DVD + streaming” customers. Likely Netflix’s primary subscriber level. That was $9.99 a month. Used to be $7.99, but they increased twice in 18 months, but that was OK, because more streaming content was available. But, their change meant I was one of the customers looking at a 60% increase for the same service. Well, less service, since they lost the Starz Play content. So, I changed to the lowest tier, 1 DVD, max 2 a month, and 2 hours of streaming for $5. Figured I’d stay there until Netflix lost enough business to re-price. Again.

Today, Netflix customers get a note, first sounding like they realized they’d made a mistake, and might be correcting it, but then the note goes on to tell us how they’ve decided to throw away their one big competitive advantage. They’re separating the DVD business and the streaming businesses entirely. Creating a new brand for the part of the company everyone knows, and requiring people manage their DVD and streaming queues separately. So, instead of being the only company to integrate and provide DVD and streaming, they’re making it really easy for Amazon and Blockbuster to each pick off the two separate segments of the company.

Think about that, for the millions of customers. The well known Netflix envelope is going to change. An entirely new name. An entirely new web site. Customers do not usually like change, and they hate radical change, unless you’re charging them less money. 

Really? This reminds me of the SNL Weekend Update skit. All Blockbuster needs to do is undercut Netflix, uh, Qwikster’s price by $1, and just run a 6 month promotion for Netflix customers, and steal us away in droves. Throwing away a huge competitive advantage is likely to be at the core of why this is such a fascinating train wreck to watch. Especially choosing this as a response to the prior pricing misstep, which contributed to halving the stock price, and will cost the company a million or more customers.

And speaking of two businesses, the duplication, and increased cost of two businesses is huge. The new business will have its own CEO. How much corporate overhead will be duplicated between these two divisions? The market knows that increasing your overhead, while your revenue may be declining, isn’t likely to generate increased profits.

Long term, this may be the right thing to do. Certainly, very long term it is. But, is this the right timing/pricing? Well, all of us in the peanut gallery have been wrong before. Did we really need yet another mp3 player when Apple introduced the iPod? But one thing that is clear, the way Netflix has gone about this has generated very negative feedback from a large number customers. That’s really the most important learning. How you handle communicating and implementing changing business models with your customers is vital. Do it wrong, and they’ll turn on you.

Recovering is hard, and expensive, and not something execs are often able or willing to do. You don’t get to be good CEO without having an ego of steel. You have to have a vision, and be able to follow it no matter what, ignoring your detractors. If Amazon CEO Jeff Bezos listened to detractors, we’d not have gotten Amazon Web Services, which launched more Internet start ups than you can shake a stick at, and is now the 800 pound gorilla in the Cloud Infrastructure industry.

I was at Sun Microsystems when Jonathan Schwartz changed the stock symbol from SUNW to JAVA. In fact, I managed a large part of the Java organization sometime after that. Jonathan had an ideas why he wanted to do this, one was that Java was a more well known brand than Sun. However, changing the stock price is expensive, confusing, creating a sense inside the company that Jonathan didn’t get it. In fact, it gave exactly the wrong message, that Sun indeed was a declining brand, and that Sun was acknowledging that, and publicly reflecting it in its stock symbol. What Sun needed was to design, build, and deliver better products the industry needed, not to give up on the brand.

Netflix obviously has a crisis team, after stock lost 50% of it’s value, and they’ve loosing so many customers customers. But, the crisis team should coordinate the advisory resources to be hired to handle the crisis, not try to handle it themselves.

I believe when companies going through this kind of crisis, what they need is to hire a good, external PR firm. Having employees try to manage a PR crisis seldom works well. Employees are too close to the business, they know too much about where the company has been and wants to go, and can’t separate the plans or what the CEO or exec team has said the company is doing from what the company needs to do. The fact that the pricing and dvd/streaming split are reflections of internal business issues is very solid proof of that. Employees don’t want to make a decision that will be politically unpopular, or hurt their future career at the company, even if it’s the right thing for the company to do. An independent firm can at least tell the company they’re killing themselves, and not fear for the political repercussions of going against the corporate flow. 

My uninformed heckling suggestions:

Netflix: Hire an external PR team. Put all your egos aside, be willing to say “we totally screwed up”, un-split the business if that’s the right thing, streamline your prices, making it advantageous to both get DVD’s and streaming. Figure out how to run your business, with different licensing and cost structures, without exposing it to your customers in a way that makes things less convienient. Oh, and secure the Twitter account and Facebook ID, not just the domain name, next time before you spin off a new brand. Yikes. 

Blockbuster: You will never get a better broadside attack to dominate the DVD rental business (today is, after all, Talk Like a Pirate day). Go on the offensive big time. Target the confusion, undercut Netflix’s DVD-only prices, snatch up all the customers Netflix is hemorrhaging. What a great comeback story that would make! At this rate, you may be able to buy Netflix’s DVD business within 12 months, if RedBox doesn’t beat you to it.

Redbox: Take out a 2nd mortgage (if you can qualify) and buy Netflix’s DVD business (wait 60 days, you’ll get a much better price), and own the physical media rental industry.

Amazon: On demand is your oyster! Buy rights to a ton of content, make your on demand offering (and navigation!) significantly larger, start recommending on-demand shows to me like you do products. Heck, just partner with Comcast to deliver their on demand content to your customers, and you’d be able to grab a huge chunk of Netflix’s online business.