Friday, September 03, 2010

Netflix: the little engine that could

James Ledbetter at Slate asks why it's perennially underestimated by so many tech writers:
How nasty and wrong have the critics been? In 2005, Michael Pachter, an analyst for Wedbush Morgan Securities, called Netflix "a worthless piece of crap with really nice people running it." Today, that worthless piece of crap has a market capitalization of $6.4 billion. In early 2007, when Netflix first announced its plans to allow subscribers to stream videos instantly—rather than wait for DVDs to arrive in the mail—esteemed tech journalist Om Malik predicted that this move would "soon be relegated to the dustbin of failed ideas." Netflix has more than doubled its subscriber base since then, and today nearly two-thirds of them use Netflix's streaming video service.
What is it about Netflix that causes critics to misread it so badly? Call it the innovator's paradox: Netflix forged an identity by building a simple business—DVD delivery by mail—that had never been done before. The very fact that this DVD-by-mail idea connected so deeply with consumers led many observers to think that was all that Netflix could or would ever do. Instead, the DVD delivery service—while still vital to Netflix's revenue—looks more like the Trojan horse of a much wider strategy designed to change how Americans watch filmed entertainment.

I find this subject fascinating as a Netflix devotee. I think the reason for Netflix's continued survival is actually pretty simple: they cultivate an almost militantly loyal fanbase. They're similar to Apple, Trader Joe's, and Costco that way. It's about brand loyalty.

They managed that by developing quality products, attention to detail, fundamentals, blah blah blah, but what binds these four companies together in particular is poached a ton of people from another company whose own customers hate them. Thus Apple gave people a way out of patronizing Microsoft, Trader Joe's has Whole Foods, and Costco has Wal Mart. Netflix, for their part, had movie rental stores in general and the loathsome Blockbuster Video in particular. Among Netflix users I knew, there was a palpable sense of foreboding when Blockbuster introduced its own mail order viewing service, because we were worried it would be better than Netflix. Not excited or curious, but worried!

That strength of brand loyalty benefits Netflix immeasurably. Many of its customers (myself included) have no interest in finding better movie services even though some may well exist. I don't investigate Redbox or any of the other interlopers fully knowing that one might be better suited or cheaper for me. I tell my friends about Netflix. I post on my crappy little blog about Netflix. And so on.

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