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The Decline Of Netflix, The Success Of Capitalism And The Importance Of Looking After Your Customers

Netflix. Making Goldman Sachs look popular.

Netflix. Making Goldman Sachs look popular.

Note: I think it’s important to confess that I’ve never studied economics or politics or any sort of anthropology or social engineering so when I ramble on about capitalism, and my mild admiration for it, take into account that I’m about as educated on the subject as a wet brick. I was also a self-proclaimed Communist a few years ago.

I’m not a Fat Cat. Or a Capitalist Pig. Or by any means a die-hard supporter of The Man. In fact, after watching Inside Job, I’m ready to go camp out on Wall Street with all the other loons. However, the recent decline of Netflix has clearly demonstrated two things: firstly, that the theory of capitalism as the purest form of personal freedom does indeed hold water and, secondly, that businesses – any business – should mistreat their customers at their own peril.

It’s surprising (and perhaps somewhat unfashionable right now) to consider that sometimes capitalism works.

The Rise & Fall Of Netflix

Netflix is a behemoth, a stupidly big behemoth that, apparently, sucks up 33% of the entire Internet traffic in the US. By anyone’s standards, that’s just insane. The company has grown massively since its move into digital streaming and stands as a real glowing icon for the success of Internet ventures, paving the way for direct digital access to entertainment material and proving that the web is indeed the ultimate future of all humanity. Or at least it was.

For those of you who don’t know, Netflix is a video streaming service (as well as a more traditional DVD postal rental service) that lets you watch films and television shows directly on your Wi-Fi enabled TV, set-top box, games console, computer or tablet all for a monthly fee. A few months ago, radical price restructuring was announced that included a massive increase in the cost of their basic DVD and streaming subscription – a leap from $10 to $16, a whopping 60% increase.

Netflix forgot that it was a service company who relied on the goodwill of their consumers

Customers were not happy and took to the Internet in droves to publicise their abhorrence at the huge price punt. This would’ve come as no surprise to Netflix who expected a certain amount of unhappiness and loss of business. What came as a genuine shock to everyone though was just the sheer number of customers who actually followed through their with complaints and quit the service in protest. 800,000 people, a considerable chunk of the company’s 23 million subscribers, put their money with their mouth was and left. Fast forward to the end of the third quarter 2011 and Netflix’s stock has dropped by a gobsmacking 37%.

Investor confidence is gone.

The Theory Of Capitalism

Anyone can point out that in practice capitalism doesn’t work. And they’d be right. But it also fails for the same reason that any form of political philosophy or economic theory fails: human greed and corruption. Of course capitalism is never going to truly succeed in the ‘real world’ when petty beings are consumed by greed or power and conspire together to trick and deceive the consumer. Capitalism completely fails when the individual, you and me, are left with no other options to turn to because all of our suppliers – the ones we just can’t live without (gas, electricity, banking etc) – are in premeditated cahoots to screw us over together.

But the theory is sound.

Capitalism is about personal freedom and the ability to make choices, whether good or bad. It’s about giving everyone the freedom to chose what they consume, use and participate in, with the option that if you want to do something better, you can get off your arse and do it yourself. In a practical sense this means that if you don’t like what a company is selling, you don’t buy from them and go somewhere else instead. It is the ultimate epitome of survival of the fittest and insurance that companies have to keep their customers happy as all costs as they are the ones that ultimately control the future of the business. A lot of people call this phenomenon voting with your wallet.

Capitalism is about personal freedom and the ability to make choices

As the founder of a business this principle spurs me forward every day. If what we produce, what we create, what we sell isn’t good enough then we won’t earn enough money to put food on our tables but if we are good, if we are great, if we are better than everyone else, we will profit and succeed. Netflix forgot about this concept and started to see their customers as resources for profit manipulation rather than as the human beings who allow the business to continue. They treated their customers badly and they suffered as a result.

Remember, Customers Are God

Of course, Netflix is still making money, lots of money, more money than ever in fact, but that’s not the moral of this story. I wish I could say it was but the world is an unfair place filled with incidents that provide interesting subject material yet don’t quite manage to give blog posts just and appropriate endings.

What we can learn from all of this though is that hubris can easily be a step in the direction of downfall for any business and that following cold, calculated statistics rather than the best interests of your customers can lead to very negative consequences. Netflix forgot that it was a service company who relied on the goodwill of their consumers and instead treated them like numbers to be simply crunched and forgotten. In the end they paid the price.

Anyway, I’ll leave you with this trailer for the wonderful Inside Job for you to watch and ferment over with rage. Power to the people, comrades.

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Author: Gordon McLachlan

Gordon is uncomfortably good looking.

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  1. Espen October 31, 2011 at 11:01 am

    Now that’s what I call an ambiguous rant from an ideologically confused comrade! I actually think this proves that capitalism doesn’t work, not the other way around. See, Netflix increased their prices by 60% – in order to increase profits – and less than 5% of their users left. I’m no professor of economics either, but that means they succeeded in their goal – profits increased.

    So why is it, then, that their shares drop by 37%? It’s that darn stock market, where value is an unreal, intangible entity fuelled by fear and emotion. If capitalism worked, a company that actually – in the real world – increased their profits should surely also increase in stock value?

    • Gordon October 31, 2011 at 12:13 pm

      Stock price determines perceived value so even though Netflix still turns a considerable profit, the actual value of the company has decreased considerably, meaning – that unless the stock recovers – investors have potentially lost a lot of money which is a big blow to them. Anyone who sells stock right now would make a loss.

      • Genda October 31, 2011 at 11:00 pm

        Market capitalization, is, in fact the greatest indicator of how a company is doing. Being profitable in the short term really has little to do with it. So even though they showed good quarterly earnings they will likely be on the precipice of a slow decline. Brand value means something and they have lost that and goodwill in this exercise.

        many employees also have valuable stock options as part of their compensation plans that are now no doubt valueless. This is going to hurt them with retention of their most talented people, since those are the ones who can most easily find a new job.

        So showing one quarter of increased profitability doesn’t really matter. Will they be able to maintain growth or will they be supplanted by someone else? They have squandered some of the best loyalty capital in the world, and that won’t be easily regained, if at all.

        And the investors who lost a lot on this move? They won’t soon forget either. Lots of stock will be available once it regains a little value and will be driven back down by supply and demand. Remember, most institutional investors are mutual funds, and that’s regular people’s retirement money. They don’t do well when a fund starts to falter so anyone who bet big on Netflix is hurting even more than the market in general.

        So you say capitalism isn’t the answer. What do you espouse? Socialism? Centralized government? Where have those worked for any period of time in a large scale?

        Gordon is right, any system fails because of greed and power. And that’s a human condition.

  2. The VMCA November 1, 2011 at 7:18 am

    I’m not sure that communism is the answer (and I come from a country where the threat of nationalisation is ever present, and very scary for your average man on the street – especially with the level of govt corruption present). However, I think the true answer to ending these financial problems is accountability and transparency.

    Basically, big business, and banking in particular, need to grow a conscience. We as consumers of banking services need to take our business to those companies who already embrace the notion of good business principles. You just have to know where to look for them.

  3. Espen November 1, 2011 at 10:53 am

    @genda @vmca – if you’re both right, it means we need a conscientious, transparent and accountable system, but that is inevitably impossible on a large scale because greed and power is a human condition. If that truly is the case, we’re fucked anyway.

    I come from a country quite similar to @vmca, and to me nationalisation doesn’t feel like a threat. So if I were to offer my tuppence, I’d suggest social democracy, where the government has some level of control and big business isn’t without restriction.

  4. freedomunrestricted December 1, 2011 at 4:48 pm

    I think this was actually a fine example of capitalism. People were not happy with the services provided for the amount of money charged. Netflix felt they were the only game in town and could raise prices without much resistance. So people walked away and took their business to other sources such as Amazon prime. Competition is what drives people to be better and invent the next big thing. If there is no reward for hard work and effort what would keep people from doing the bare minimum and muddling through?

  5. [...] you could easily say that healthy competition is a good thing (the power of capitalism and all that), and usually you would be right, the last point in my list really takes the biscuit. Dropping [...]

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