Commentary

Netflix Succeeds By Focusing on Superior Navigation and Keeping Prices Down

The question persists whether Netflix will become Blockbuster or continue as a blockbuster. Like the video chain, will it lose relevancy. Or, will growth with both its number of customers and its share price keep wowing?

So many businesses with a taste of success begin to have overly rosy visions of their possibilities and pursue expansion too quickly and unwisely. Netflix gives the impression it knows its limits, believing it can drive revenues by sticking to its knitting, with maybe a few side bets.

In an appearance this week, Netflix CEO Reed Hastings said the company has a "niche" philosophy and is looking to get "not too big, not too small."

How many CEOs with a Wall Street constituency acknowledge any limits, or veer from something akin to "there's more low-hanging fruit than we have time to gobble up"?

Netflix is gambling with an original series with Kevin Spacey and moves to acquire some exclusive content with the likes of "Mad Men." But, its core growth strategy is two-fold: offer a superior customer experience with easy navigation and keep prices down.

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It shines in both. Elsewhere online, it is still hard to find desired content swiftly. Netflix simplifies that dramatically. And it offers an excellent recommendation engine to turn viewers on to more easily found choices.

And it's $8 a month for an online-streaming plan.

Netflix has 22 million-plus customers. There's no indication it's likely to make the Blockbuster mistake of not realizing soon enough where the customer is going next (it recognized online streaming as the new frontier early). Part and parcel is avoiding the MySpace mistake: the social-network site felt it had such a critical mass that mass defection wasn't possible.

Of course, Netflix needs to acquire desired content, which is pricey and dicey. But its core selling propositions should serve buttress it from getting into crippling auctions for TV and film rights.

Netflix also has no desire to spend a fortune for live sports or even opportunities to re-air TV shows soon after air.

Its sunniness lies in the "rainy day" approach: amass a library of back or previous-season episodes, allowing a person to sit on the couch and watch one after another on-demand.

"We've consistently said getting into current season [TV] or newer movies would not be profitable for us," CEO Hastings said in a panel discussion led by Wired editor Chris Anderson. "It would be an Armageddon. It would be World War III, and we likely wouldn't survive that battle."

One area Netflix could exploit in content offerings is with lower-profile content such as documentaries, independent films and brilliant-but-cancelled TV. Acquisition costs would be low and there is upside if promotion directs viewers to the stuff and in building a niche fan base.

To wit: Fox's cancelled "Family Guy" found such a passionate DVD audience that the network brought it back.

Several months ago, Time Warner Cable CEO Glenn Britt offered praise for Netflix, but seemed to suggest another distributor might be able to replicate -- or outdo -- its business. One way: perhaps the likes of TWC offering flush video-on-demand options on its TV and online services.

"They have a wonderful interface, which anybody can hire a bunch of Web designers and do that," Britt said of Netflix. "What's the value-add of what they're doing?"

At least for now, it's that customer experience. Cable operators are looking to improve it, but there is difficulty in navigating through its mass of VOD content. A few clicks on Netflix and an episode can be playing.

Then, there's that $8 a month. Britt could have made the credible argument that it might not be sustainable financially to keep the price stable and because Netflix is so identified with its pricing, even a slight increase to $10 a month would cause some sticker shock.

Cable operators face less trouble there, having proven crafty at sliding in price jumps that avoid much notice.

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