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While Netflix Stumbles, Competitors See New Opportunity

October 27, 2011 at 12:00 AM EST
Major changes to the Netflix rental system sent its stock plummeting Tuesday after losing 800,000 customers between June and September. Margret Warner discusses Netflix's recent business troubles with StreamingMedia.com's Eric Schumacher-Rasmussen and The Washington Post's Cecilia Kang.
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TRANSCRIPT

MARGARET WARNER: Now, Netflix stumbles badly, and its competitors see an opportunity in a fast-changing media and entertainment landscape.

In recent years, Netflix’s familiar red envelopes delivering DVDs by mail symbolized a company on the rise with an ever-expanding customer base. But late Monday, Netflix announced that it had lost 800,000 subscribers, 3 percent of its customers, between June and September.

The next day, Netflix stock plummeted 35 percent to $77 a share. It had been $304 in July. That means the company has lost three-quarters of its market value, some $9 billion, in just three months. The trouble started when Netflix announced a major change to its rental system in July. No longer would its DVD customers receive online video streaming for an extra $2 a month. Those who wanted both services would now pay $16 a month, a hike of 60 percent.

There was an angry outcry on the Internet, and many customers threatened to cancel their accounts. In September, in a Web video, company CEO Reed Hastings apologized for the clumsy way Netflix had handled the price hike. But he said the DVD service by mail would be spun off and renamed Qwikster, with its own Web ordering site and separate billing.

REED HASTINGS, Netflix: When we communicated that to our subscribers and it involves a substantial price increase for most members, I didn’t make the communication, and we didn’t explain why we were doing it. Over time, both DVD and streaming will be much better because they’re separate. And, in fact, we think that the DVD service needs its own brand, so that we can advertise it. So we have named our DVD service Qwikster.

MARGARET WARNER: Then, after another customer outcry, on Oct. 10, the company said it was abandoning plans for the separate services.

But now, with some consumers turning away from watching television, Netflix faces growing competition in the online streaming market. Online retailer Amazon.com, and the country’s largest retailer, Wal-Mart, have rolled out movie streaming services. Customers also can buy or rent online movies and TV shows from Apple’s iTunes. And Hulu offers free online viewing of recent TV show episodes.

Still, with nearly 24 million U.S. subscribers, Netflix remains the dominant player in this market.

And for more on Netflix and prospects for its competitors, we turn to Eric Schumacher-Rasmussen, the editor of StreamingMedia.com, a website and company that closely monitors developments in the online video industry, and Cecilia Kang, a technology reporter for The Washington Post.

Welcome to you both.

Cecilia, beginning with you, Netflix only lost 3 percent of its customer base. Why would its tank — stock absolutely tank like this?

CECILIA KANG, The Washington Post: Well, I think the problem with Netflix or the lack of confidence that these decisions had on the company and its subsequent stock fall had to do with the fact that the company was rising so quickly and it was growing its customer base so quickly, because the story of Netflix was of a company that really got its customers and really understood consumers.

And then it made these series of decisions that really showed that it — one decision after another — really wasn’t listening to its consumers. It might have been working too fast in making business decisions and technological changes that consumers really weren’t ready for.

And so that signaled a bigger lack of confidence for investors in the stock market. And that’s what really lead to the decline. This is a company that was known for making your life easier, no late fees, cheaper service, an alternative to cable. And suddenly it seemed like it was going back on all that it stood for.

MARGARET WARNER: And, so Eric Rasmussen, do you agree with this, that it was — it was really a loss of confidence in Netflix’s ability to be in tune with its consumers? It was a lot more than that they were losing 3 million subscribers — or 3 percent of their subscribers?

ERIC SCHUMACHER-RASMUSSEN, StreamingMedia.com: Yes, absolutely.

I mean, this is something that has been building up, as you said, since July. And Netflix, as you said, you know, made its name by making life easy for its consumers. But it also achieved a great deal of its success, at least in the online video world, by being, by default, the only game in town, and if not the only game in town, the easiest game in town.

When streaming video, streaming movies to your computer or your laptop or even your television was easy, and when it was included in the subscription fee or just a couple of bucks more, it was easy, and people didn’t care too much that only a relatively small number of titles were available.

Once Netflix decided it was going to charge more, and did a pretty poor job of explaining why, then people looked at their bill, they looked at the movies that were available, and they decided to either make a choice between getting DVDs or watching online, or ditching Netflix entirely.

MARGARET WARNER: So, what does this hue and cry, Cecilia, tell us about how people want their content delivered? In other words, you said you thought maybe Netflix — well, go ahead. Just answer that.

CECILIA KANG: Sure. I think people want choice. I think people want choice. They want lower costs. They want alternatives to what they see is expensive maybe cable or satellite television service. They want different options.

And what Netflix did for many years was, first, with their DVD mail-in service, in not charging late fees, they presented an alternative to the corner DVD rental store that was charging really high rental late fees. Then, with the streaming service, they really provided a real alternative to cable, in that you could stream on your laptop, your game consoles, on your phone.

In my home, we have multiple devices streaming all the time, different videos — an alternative to spending extra money on top of your Internet costs and your cell phone costs, all the different communication services that you pay for every month. It allowed you to trim those down a little bit and maybe just pay for only Internet and your cell phone for a lot of people.

MARGARET WARNER: So, Eric Schumacher-Rasmussen, do you think that a majority or even a significantly growing number of consumers really want streaming video? I mean, what does this whole furor tell you?

ERIC SCHUMACHER-RASMUSSEN: Well, consumers definitely want streaming video, but I think that the importance of it has been overhyped just a little bit.

I live and breathe in that industry, but even in the industry it’s been hyped a bit. You know, you have to remember that right now Netflix is just one service. There are many services that offer different types of streaming video, online television shows, online movies.

But they’re all available on different devices. There’s no single device, no single service that offers consumers everything they’re looking for. And so at least at the moment, the market is so fragmented, that even though people I do think want to get their content streamed to them, whether it’s on their computers or their TVs or their mobile devices, at the moment, there is too much choice, really.

If you have a certain kind of TV or a certain kind of device, you can get some content, but not others, and on down the line. So until that’s worked out, the desire is there, but I don’t know if really the market is there yet.

MARGARET WARNER: Now, we reed and hear that the combination of cable TV and TV through your phone is actually going down for the first time, started last year. Is that connected to this, this video…

CECILIA KANG: I’m sorry. You mean the…

MARGARET WARNER: Well, cable, satellite and all the ways people get television…

CECILIA KANG: Right.

MARGARET WARNER: … that the total number for the first time last year dropped.

CECILIA KANG: Absolutely.

So, what is happening? Netflix was the first real challenge to cable TV. As much as Netflix would say that, we’re a friend of the cable TV industry, they really weren’t. Cable — people are cutting their cable subscriptions, especially in this economy, because they see that — they are sowing alternatives that present themselves over their iPhones, their Droids, their different devices.

And now Amazon is in the race as well with their Kindle laptop — their Kindle tablet. So you — this definitely plays into it. There is a fierce battle, probably one of the biggest, richest battle, if you will, fortunes really at stake, playing right now on the future of how we consume our media going forward and who are going to be the people who control and get the most money out of that.

Is that going to be Hollywood? Is it going to be the device makers? Is it going to be the software makers? Maybe it will be companies actually that have their fingers and their toes in a lot of those spaces, like Apple and Amazon.

MARGARET WARNER: So, Eric Schumacher-Rasmussen, is anyone — is any company that is offering online streaming actually self-supporting? And, if so, how do they do it? In other words, is there a financial model emerging that is an alternative to the subscriber base that Netflix does?

ERIC SCHUMACHER-RASMUSSEN: Not at the moment, no.

All the services that are having any degree of success right now, whether it’s Amazon with the streaming they offer through Amazon Prime or on demand, or whether it’s Apple with iTunes, those businesses in and of themselves are not self-supporting.

Hulu, for instance, is not still successful enough.

MARGARET WARNER: That’s for TV shows.

ERIC SCHUMACHER-RASMUSSEN: It recently took itself off the auction block. They were trying to sell Hulu and ultimately decided that there wasn’t enough interest there, simply because the business model isn’t there yet. We still don’t know whether advertising or pay-per-view or subscription is going to be the way that people want to pay for their online video content.

MARGARET WARNER: So, bottom line here, Cecilia, is Netflix still in good position to move forward?

CECILIA KANG: Sure. It’s still the 800-pound gorilla in this space.

And there aren’t many competitors that are doing exactly what they do. They have subscribers that are still very loyal to the company as well. So competition is encroaching in their space, but, in a year, we might say that that was actually a good decision, that they are moving into online purely, but maybe too fast.

MARGARET WARNER: So, a future that we definitely can’t foresee.

Cecilia Kang and Eric Rasmussen-Schumacher, thank you.