What would have happened, if Netflix, in the spirit of its analytical competition, made an immediate term analytics challenge and asked for a solution of price dynamics and market dynamics instead of deciding on a botched decision-making process to change the prices betting easily 10 Billion dollar worth of market value of the company, which it lost in 3 months time.
Recall, it instituted the well known Netflix competition when it was $2 Billion market value company. It seems like it took it easy in developing, analyzing, and instituting a not-so-well understood price elasticity solution.
What would the life time value of the company for investors, had it done right the price changes in the beginning of summer?
Here is the story:
– Netflix believes in analytical competition as a company wide culture; it was the first company that boldly went ahead for a world wide competition for a million dollar to develop a key analytical solution that supports its distinctive need. Mr. Hastings started Netflix as a competition to Blockbuster model and wiped that out of competition.
– Consumer monthly price of digital viewing (recent development) $8
– Direct mail DVDs (the company started with this as the channel of delivery) +$2 (call Netflix to confirm these changes)
– 25MM subscribers, as of beginning of summer 2011
– 12MM of them use DVD option; 3MM use both; 10MM use only Net
– Expected to loose 200K subscribers because of a new pricing option. +$8 for incremental DVD option, but lost 800K subscribers attributed purely due to this price changes.
– A Huge Prediction Error in Price Elasticity from the point of view of the markets
The company lost close to 50% (almost $8B in market value) from its peak $16B market value of the company in the beginning of the summer to current value of $8B (latest news). Loosing in a growing market by the industry leader is unheard of. All, because of prediction of price elasticity and its implications to the market.
It is everyone’s guess what would be the CEOs decision had he been given a well understood and a better estimated price elasticity, market dynamics, and all its resulting effects for each and every segments.
Listen to the video discussion in CNBC.
As of now, September 19th, 2011, 9:30AM, the CEO Mr. Hastings is thinking it is about the way the price changes have been communicated. Reference
As of now October, 2012, the company lost half of the market value from October 2011.
In his seminal book, ‘The Innovator’s Dilemma,’ Clay Christensen talks about why industry leaders almost always fail to act when ‘disruptive change’ enters their business. He defines this as new products that are dramatically cheaper, lower quality, lower margin but larger markets. … To win the future (Hastings) needs to attack his core assets by building new ones. Very few companies ever do this. Reference The Innovator’s Dilemma