Don't call Netflix's CEO 'Greed' Hastings just yet

Many people have tried comparing Netflix to competitors recently, but what they've failed to consider is the company's expertise in online video and its ability to create the kind of experience that keeps customers happy.

For those Netflix customers who may be thinking about dumping their subscription in September when the company plans to raise rates as much as 60 percent, here's one more thing to consider: to determine where the company is headed, it might help to look at its past.

Netflix

CEO Reed Hastings has a long, if imperfect, record of serving customers, which no one else renting movies online can match. For a decade, Netflix has created technologies and features that have continuously provided customers with more and more savings and convenience when it comes to renting movies. How can we forget that had it not been for Hastings, we'd likely still be devoting time in video stores, wandering around scratching ours heads about what to watch while enduring the long lines and crappy retail environment.

Now juxtapose that image with the Netflix experience. Year after year, the service is at the top of consumer-satisfaction surveys. There's a long tradition of treating customers well and that may be something to consider when calculating the value of the service.

But there is also this: on July 12, Netflix announced it intends to do away with hybrid subscription plans that include access to both DVDs and Internet streaming, which for the time being cost $9.99 a month. Come September, there will be one plan for DVDs and a separate plan for streaming. Unlimited access to Netflix's streaming library will cost $7.99 per month, the same cost for the DVD plan (with one disc allowed out at a time). To access both discs and Web video, people will have to pay for each plan separately, and that means $15.98 a month. The company said in its announcement that it hadn't anticipated the continued demand for DVDs and that it didn't make financial sense for Netflix to continue offering discs in addition to streaming access for $10 per month.

On Twitter and Facebook, there was much lament and gnashing of teeth. Thousands of customers threatened to cancel their subscriptions, and Netflix for the first time in a long while wasn't being applauded by customers. We might find some clues about what led the company to raise prices this afternoon, when the company reports second-quarter earnings. Analysts expect Netflix to report a net profit of $1.11 per share, an increase of about 38 percent from the same quarter a year ago.

Until the price hike, Netflix had been on a long winning streak, anchored largely by the Internet streaming service.

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Netflix began rolling out Watch Instantly four years ago, way ahead of competitors. Initially, it was only available on PCs but then the company's next step was to partner with manufacturers of set-top boxes, videogame consoles, and Web-connected TVs. These devices enabled users to watch Web video in their living rooms, which put Netflix in a position to compete for viewers with cable and traditional broadcast stations.

Netflix then began licensing TV shows and films produced by such companies as Paramount, Disney, Sony Pictures, and NBC Universal. By combining well-known TV shows and films with a means to watch them on a big-screen TV, Netflix helped create a new rental market. The number of subscribers jumped more than 60 percent from the end of 2009 to the same period in 2010 and the company now has more than 23 million total subscribers.

Low prices played an important role. Netflix is a cheaper alternative to cable. Netflix's current $10 monthly fee is 10 times less expensive than many cable packages.

Going further back, Hastings, 50, pushed the company to improve the rental experience. He broke ground with the "dynamic queue" a system that enabled customers to rank their film preferences so once they returned a movie, the company knew what title to mail out next without anymore input required from the customer. Netflix also helped users find new movies with its surprisingly accurate recommendation algorithm.

Then, there were the less techie innovations. Netflix was among the first major online companies to let subscribers cancel subscriptions online. This was a big deal because in the early 2000s many Internet companies required customers to call in to cancel, which often was less convenient for consumers and was sometimes a nightmare. AOL's service reps became famous for either ignoring cancellation requests or trying to badger people into staying with the company.

What likely generated as much customer love as anything else was Netflix's refusal to charge late fees. This forced Blockbuster and other competitors to drop the much-loathed practice so Netflix customers weren't the only ones to benefit. The killing of the late fee is part of Netflix lore, and Hastings has probably told the story a hundred times of how he was late returning a copy of the Tom Hanks flick "Apollo 13" and Blockbuster charged him $40 in late fees. The sum was large enough that he was embarrassed to tell his wife. That uncomfortable experience got him thinking about a way to rent videos without late fees. Voila. Netflix was born.

Read a Q&A with Eric Garland, CEO of Big Champagne, who says Netflix CEO Reed Hastings is making an Apple-like power move on Hollywood. Greg Sandoval/CNET

One unanswered question about the story is, if Hastings was so determined to kill late fees, why did he initially charge them? When Netflix launched in April 1998, first as a pay-as-you-go rental model, Netflix charged $4 per movie, $2 for postage, and late fees applied. The fee disappeared around the same time managers concluded that their pay-per-view business model was broken and switched to a subscription model. Through a Netflix spokesman, Hastings declined to comment.

For anybody keeping track, the price hike isn't the first time Netflix has been at odds with customers.

In 2005, Netflix acknowledged that it employed an unpopular practice known as throttling. This came as a result of a 2004 class-action lawsuit on behalf of Netflix customers that accused the company of false advertising. Prior to the suit, Netflix promised customers who paid $17.99 a month next-day delivery on most discs. In reality, Netflix would hold back, or throttle down, shipping to customers who were heavier users of the service--and therefore less profitable--to save money.

The case was settled without Netflix admitting any wrong doing and the company agreed to provide subscribers with a free month of service. Managers also changed the Terms of Service to inform users about how the company shipped discs.

Still, what Netflix customers should know is that while the company doesn't always make popular decisions, it rarely makes one without thinking about it long and hard, according to Barry McCarthy, Netflix's former chief financial officer.

"We try many versions of one thing at the same time and let the marketplace tell us which thing works best," , McCarthy said during an interview with the Unofficial Stanford blog in 2008. "Then we rapidly iterate on that thing to make it better and better....We pride ourselves on our ability to very rapidly iterate and test, test, test and let the marketplace inform us what works."

 

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