Perseverance, Not Apologies, Allowed Netflix To Prosper

Three technology executives from a San Francisco-based firm, Play Bigger Advisors, are marking the third anniversary of Netflix’s marketing gaffe in an article on Fortune’s Web site.  They say that Netflix’s huge success now is largely due to the fact that CEO Reed Hastings apologized then.

I don’t disagree, exactly. It seems pretty apparent now that a good hearty of act of contrition, possibly performed on a television program, has a way of making everybody remember that, they too, forgot an anniversary at home, or a decimal point at work or to come to a full stop at the corner.

And what they liked, and what they remember, is that a few times when those things happened, people forgave.

Athletes are usually too narcissistic to make anyone truly believe their apologies, and actors’ peccadilloes, really, part of the entire lying package. Politicians are totally unbelievable. But when that boyish British actor Hugh Grant,apologized so innocently, and almost daily, for hooking up with a Sunset Boulevard hooker back in 1995, the template was cast. Not only could you create a scandal, but by owning it, convincingly and with charm, you set yourself free.



Still, I think Dave Peterson, Al Ramadan and Christopher Lochhead,the authors of the Fortune piece attribute too much of Neflix’s success to Hastings’ apology for trying to separate the Neflix red-envelope business from the video streaming business -- and raising prices to boot.

He rescinded those decisions and apologized in a letter and a video two months later and suffered as Netflix shares went from nearly $300 a share then to just above $50 even a year later. And as apologies go, no one has done it much better.

But what was true about Netflix in 2011 is even truer today. Three years ago, streaming video was still kind of new. Now, it’s not. And Netflix, then as now, is the hugely dominant name in the business from a delivery-of-product standpoint to content-producer. Though there are several places to buy/rent commercial-free movies online, no one has the cache Netflix does.

Hastings didn’t have to apologize so fully. He just had to persevere. All he and Netflix had to do was continue to pump money and marketing into the streaming end of it when nobody else was doing that as much. (But the apology didn’t hurt, and certainly not with the press that sees those kinds of mea culpas as sweet vindication, of something.)

“When Netflix stumbled, it was savvy of them to ask for the market’s forgiveness. Consumers wanted Netflix to bounce back. The market had come to depend on Netflix,” write the guys from Play Bigger. “Better yet, once forgiven, Netflix rewarded its customers – by innovating and making its services even better….. It made a big and bold bet that proprietary entertainment – purpose built for Internet streaming – would drive revenue and expand their market ever further. Man, did it work.”

The results are pretty stunning today. Netflix has 35 million U.S. subscribers now; it had 28.6 million a year ago.  So things are forgiven. In one quarter, its most recent one, revenue has increased 5.54% to $1.34 billion.

When Netflix reported its second-quarter financials a few days ago, revenues were up 25.3% from the year before. Earnings grew an astounding 135%, and the stock price has gone up by 76% from a year ago. Now it's selling for just under $432 a share.

TheStreet today assembled a sheet of financials that suggest in pretty emphatic terms that Netflix has nothing to apologize for, and beyond acknowledging it made a business mistake, it never had to be sorry as long as it kept Netflix pushing on the streaming end of the business. It did, and it does, and it owns the category.

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