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Netflix and Kodak: two separate news headlines, one big branding story

By Alan Brew

The first headline: Netflix adds new woe: red ink.

The news item in the Wall Street Journal last week finally laid bare the extent of the damage Netflix has inflicted on itself this summer.

A series of botched efforts to separate its core DVD-by-mail service from its newer, video-on-demand-style streaming library has cost the company 810,000 net subscribers in the third quarter. The announcement sent its share price plunging a further 35 percent, knocking another $2 billion or so off its market cap.

The quagmire started when Netflix decided to raise its fees by $6 a month for people who wanted both the company’s red-envelope DVDs-by-mail service and access to its newer, video-on-demand-style streaming library. It was met by a surge of Twitter fury and a wave of customers vowing to unsubscribe.

Insult was then added to injury when Netflix practically declared that its core DVD-by-mail service was for Neanderthals who still feel weirdly attached to antiquated entities like the Postal Service. They were no longer eligible to be members of the Netflix club – they’d have to join something called Qwikster.

Appropriate ridicule was heaped upon the name. And in a stream of groveling apologies, CEO Reed Hastings reversed the whole plan – except for the price increase.

While all this demonstrates a total ineptitude when it comes to a brand communication strategy and understanding the relationship people have with brands, one can sympathize with CEO Reed Hastings’ business dilemma.

Buried in his mea culpa email to subscribers was the real burning platform issue that he is rightly concerned about.

“For the past five years, my greatest fear at Netflix has been that we wouldn’t make the leap from success in DVDs to success in streaming. Most companies that are great at something – like AOL dialup or Borders bookstores – do not become great at new things people want (streaming for us) because they are afraid to hurt their initial business. Eventually these companies realize their error of not focusing enough on the new thing, and then the company fights desperately and hopelessly to recover. Companies rarely die from moving too fast, and they frequently die from moving too slowly.”

The pity is that, until this meltdown, Netflix was thinking intelligently about its future. With studios seeking to monetize their libraries more aggressively and competitors pushing into the streaming-video business, the market that Netflix has had to itself is clearly changing. Even if its execution has so far left a lot to be desired that doesn’t change the fact that it’s still got the right strategy: digitization of content is the wave of the future and it will lay waste to any industry that can’t change.

Which brings us to the second headline in the same edition of the Journal: Kodak seeks rescue funds.

If there’s another company that keeps Netflix’s CEO awake at night it must be Kodak. Here is a revered American company and at one time a powerful global brand brought to the brink of bankruptcy by its inability to change and meet the digitization wave which has all but destroyed its core film business.

Founded in 1880 by George Eastman, the company is struggling to complete a challenging transformation from a company reliant on a dying film business to a seller of consumer and commercial printers.

In Clayton Christenson’s classic treatise “The Innovator’s Dilemma,” technology giants are frequently topped by “disruptive” technologies that erode seemingly impregnable businesses, often with startling speed. This is partly because it’s easy for incumbents to dismiss the disruptive potential of a fledgling technology–a classic hazard of linear thinking–and partly because adapting to the new world would itself disrupt existing, and usually highly profitable, business relationships.

So Netflix CEO Reed Hastings deserves some major credit for trying to buck this trend. With the high fixed-cost DVD business on the verge of stagnation, Hastings took the almost unprecedented step of effectively blowing it up in order to speed the transition to streaming.