Reed Hastings was soaking in a hot tub with a friend last month when he shared a secret: his company, Netflix, was about to announce a plan to divide its movie rental service into two — one offering streaming movies over the internet, the other offering old-fashioned DVDs in the mail.
“That is awful,” the friend, who was also a Netflix subscriber, told him under a starry sky in the Bay Area, according to Hastings. “I don’t want to deal with two accounts.”
Hastings ignored the warning, believing that chief executives should generally discount what their friends say.
He has since regretted it. Subscribers revolted and many dropped the service. The plan further tarnished a once widely respected internet service that had already been wounded by an unpopular price increase in the summer. Hastings was forced to reverse the planned split — but not the price increase — three weeks later and apologised.
On Monday, the company revealed the damage that had been done. It told investors that it ended the third quarter of the year with 800,000 fewer subscribers in the United States than in the previous quarter, its first decline in years.
Despite the decline in subscribers, the company did well financially in the quarter. It reported net income of $62.5 million, or $1.16, a share, compared with $38 million, or 70 cents a share, in the year-earlier quarter. Revenue rose 49% to $822 million. Both revenue and income topped analysts’ expectations.
Like many other companies built in Silicon Valley, Netflix prides itself on its analytical, data-driven approach to making decisions. But it made a classic business misstep. In its reliance on data and long-term strategy, the company underestimated the unquantifiable emotions of subscribers who still want those little red envelopes, even if they forget to ever watch the DVDs inside.
Hastings said in an interview last week, his most detailed discussion yet of the bruising period, that he had been guilty of overconfidence and of “moving too quickly”. But he said he still believed — as do nearly all investors and analysts — that Netflix’s future lay not in DVDs but in streaming over