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How Many Do-Overs Should a Company Get?

I've been at odds for a while over a rule in pro football (in the US, that's grid football) that allows a coach to challenge a ruling made on the field. In the heat of the moment, a ref makes a call based on the best information he has at the time. Technology — and, I would imagine, money — has since made it possible for refs to review the play and reverse their calls. Such rulings have changed the outcome of the game.

I think it is a little less than sporting to allow a do-over. It's the variables, including human error, that make sports interesting. But I'm pretty sure I'm in the minority on this issue.

{complink 10269|Netflix Inc.} today has done a business do-over. The digital media provider — which sparked an outcry when it doubled its prices earlier this year — has reversed its plans to split its streaming video business from its DVD-by-mail unit. (See: The ‘Whoops’ Business Strategy in the Supply Chain.) For those of you keeping score, it's a reversal of a reversal.

Here's the replay: In July, Netflix doubled its prices — from about $4 per month to $8 per month — without telling subscribers why. A month later, the company finally explained the move — it was going to split its streaming video business off from its DVD-by-mail business. Although Netflix didn't specifically say so, the subscription hike would presumably finance the execution of this plan. Today, however, Netflix announced it was dropping the plan entirely.

Where does this leave Netflix subscribers? They are still paying the higher fee, without the benefit of an improved business model. In football parlance, subscribers have been penalized for a bad call on the field.

Not surprisingly, Netflix's stock dropped — again — on the announcement. Last Friday, according to the Wall Street Journal, the stock closed 62 percent down from an all-time high in July.

I understand that CEOs, like sports referees, are human and therefore fallible. They make mistakes. And often, they pay for their mistakes by losing their jobs. Case-in-point: {complink 2376|Hewlett-Packard Co.}, which, like Netflix, made a surprising announcement a few months ago. HP is considering spinning off its PC business. The CEO who made that announcement, Leo Apotheker, is no longer there. (See: Dancing on HP’s Grave? Not Yet and HP’s Board Adds to Its Errors With Whitman Appointment.)

HP hasn't changed its plan — yet. The one thing HP has done correctly in the past few months is that it didn't commit to a spin-off: the company said it was considering one. (See: Bumbling HP Strikes Again.) Netflix, on the other hand, made its move before explaining the reason why, and then changed its mind.

I've never been a Netflix subscriber, but if I were, I would have cancelled my subscription the minute prices were doubled. It's not that $8 per month is a lot to pay for unlimited programming — I pay at least that much for various cable services. It's the lack of a valid business explanation that gets me.

Most people understand that it costs money to restructure a business. Netflix subscribers might have swallowed the rate hike if they had known the company's plans, which were not explained upfront. But the point is moot, anyway, now that the company is not splitting its business. Netflix is back to square one without anything to show for it, except a bunch of angry subscribers.

I find it amazing that Netflix has any subscribers left at all, but does the company deserve another do-over? If so, how many do-overs should a company get before customers and shareholders abandon it completely?

7 comments on “How Many Do-Overs Should a Company Get?

  1. Ariella
    October 10, 2011

    Giving up the Qwikster idea is not helping it rebound. But it is possible that in time customers will forgive the company.

  2. Daniel
    October 11, 2011

    “Most people understand that it costs money to restructure a business”

    For doing business money is required, but the company has to find out a suitable VC or other source for investing capital. They cannot expect that their investment can be collected through subscriptions. Subscribers are NOT foolish peoples like Netflix CEO.

  3. jbond
    October 11, 2011

    The biggest problem Netflix is going to have to face is responding to the price hike. It's understandable when companies hike prices due to circumstances out of their control like; fuel prices, energy costs, labor costs, and many others, but Netflix raised the prices in order to raise capital to grow their business. Now that they're not going that route, reasonable people will be asking “why haven't the prices dropped back to previous amounts?”

    I'm not a subscriber and never have been, but I would think Netflix needs to answer these lingering questions before they risk losing even more customers and their stocks drop even more. 

  4. saranyatil
    October 11, 2011

    Where does this leave Netflix subscribers?

    I would have cancelled my subscription, thankgod i have not availed any membership with them. It is really a wrong idea to increase the rates with out any intimation this is not the way you treat your subscribers.

    This will definitely deplete new subcribers enrolling and to come back will take a long time.

  5. William K.
    October 11, 2011

    What is the big deal about Netflix raising their prices? The price of everything else gets raised and we have no warning, no explanation, and no choice. Comcast routinely bumps the price up. Prices go up whenever there is insufficient competition to keep them down, or, like the oil companies, when they all agree to raise prices at the same time.

    As for “how many do-overs does a company get?”, why hold anybody to a wrong choice when they attempt to correct it? What is wrong with allowing some organization to correct an error when they find one? Microsoft has been doing it for years, and charging folks a premium for their corrections as well. 

    REgarding the option of an official being able to change an incorrect call in football, when have we ever seen or heard of an all-seeing and totally infallible referee? Of course, some errors and incorrect calls may not be challenged, and some challenges may be unfounded, but does that make enforcing an erronious call the best choice? Why in this world should anybody be forced to accept somebody else's mistake when the option of correcting that mistake is available?

  6. Barbara Jorgensen
    October 11, 2011

    Good points, all, and as I said, $8 is not a lot to pay in the grand scheme of things. NetFlix, however, did not “correct” anything — their path took them back to where they started. If they had called the rate hike what it was — a rate hike — and didn't try to justify it by splitting the businesses — and then reverse the split — they would be exactly where they wanted to be without all the fuss. Most people understand rate hikes — we don't like them — but if we like a service we pay up. I think NetFlix created a lot of bad will where it could have been avoided and gotten the extra $4 anyway.

    As for correcting a mistake when it can be corrected…I admit I have two different perspecitives when it comes to business and sports. I'll have to think on that a bit more…

  7. Taimoor Zubar
    October 11, 2011

    “..the subscription hike would presumably finance the execution of this plan”

    How many companies have you heard of that double it's product prices to raise funds for a new project or expansion? There are several ways of raising finance but you can't simply double your prices in one go. I don't think the initial strategy was any good unless they offered the customers additional features or options on their subscriptions. And to revert it back with customers paying double the amount and getting the same services as before, seems absolute nonsense.

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