Netflix' Successful Transition

In July 2011, Netflix CEO Reed Hastings announced a new pricing model separating its streaming service from DVD-rentals. The combined subscription that had previously cost $9.99 was split into two separate plans at $7.99 each. The pricing reform was followed by public outcry over what was effectively a 60 percent price hike for subscribers of both services.

Hastings insisted that the change was necessary to ensure his company’s future success, but Netflix’s stock began tumbling nonetheless. To make things worse, Netflix announced in September that it would spin-off its DVD business into a newly-formed company called Qwikster, only to discard the plan a few weeks later. This episode did not fare well with customers and investors alike and by the end of the year Netflix’s share price was down more than 70 percent. The stock hit rock bottom in August 2012. By then, Netflix had lost more than 80 percent of its value since July 2011.

Since then, Netflix slowly regained the trust of customers and investors. The company invested in original content such as the critically acclaimed “House of Cards” and the highly anticipated return of cult comedy “Arrested Development”, and results started to improve. After Netflix had announced positive fourth quarter results in January, the company’s stock jumped more than 40 percent in a day and around 80 percent in a matter of weeks.

The same thing happened yesterday. The stock jumped more than 20 percent in after hours trading after Hastings had announced that his company had added more than 2 million U.S. streaming subscribers since January. Adding to Netflix’ investors’ new found confidence was the fact that the company’s operating profit started to re-accelerate, indicating that the company has a future as a profitable streaming company.

It looks as if Hasting’s unpopular decision in July 2011 may have enabled his company to master one of the biggest challenges a business can face: responding to a new technology that threatens to obliterate the market you’re winning in. By using the money from the highly profitable DVD business to heavily invest in the growth of Netflix’ streaming business, Reed Hastings may have saved his company.