Indiana Jones and The Great Netflix Problem

In the Indiana Jones films, there is one scene that to me, sums up the greatest lesson any entrepreneur and business developer can master; building a successful product is very different from running a successful business.  They may sound like the same thing, but in reality, they are very different.

The scene itself is the one where Indiana escapes with his father from a Zeppelin Air Ship via the escape plane.  Like any good entrepreneur, Indiana, an intrepid and resourceful problem solver, sees the opportunity in front of him and dives headfirst into taking advantage of the opportunity.  After all, having a first mover advantage is a major asset when trying to turn an idea/opportunity into a realization.  It’s especially true when the opportunity is the chance to escape capture and not die.  As expected, Indiana takes the plane, but when confronted by his surprised (and impressed) father about his piloting skills, Indiana quickly admits that he can, “Fly yes… Land no.”

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Although starting a company and flying/landing a plane are very different skills, Indy’s famous words resonate all too well for many successful entrepreneurs: they can develop an idea, but they have great trouble managing the company after takeoff.  It’s a situation all too familiar with a lot of great innovators.

Netflix, a product that I personally love has recently made itself a very public example of why entrepreneurs often make terrible business leaders.  Yes the founders are a very smart group of innovators who obviously know how to start a business, but the fact is they are still entrepreneurs who live by the mantra, “fail often, fail soon.”

As a result of living by such a mantra, entrepreneurs tend to make radical changes in their products.  In fact, it’s an understood part of a company’s lifecycle.  Fledgling companies almost always go through huge changes as their core idea moves from “some crazy idea” to a validated and marketable product.  In other words, the best entrepreneurs have the ability to not grow overly attached to any one idea, but rather, they can see opportunity in failure and change.  What may seem like a phenomenal idea on paper often fails, but as a consequence of failing, that idea sparks a secondary idea that ends up changes the world.  It’s called the Teflon Syndrom.  That’s a hard concept for most people to comprehend, but that’s how many revolutionary innovations come to life.

Unfortunately, that “fail often, fail quickly” mantra is also a dangerous characteristic in regards to running an established business.  What may have worked for an unknown company trying to make it doesn’t always translate well for established players.  It’s like completely changing a TV show years after it’s become a classic.  Think of I love Lucy turning into a drama.  For all we know, it could have been a great TV drama (great actors, a good story line, etc), but the fact is, consumers would never accept it.  People hate dramatic change.  They especially dislike it when they feel the change comes out of greed.

And that’s where Netflix is today.  They are run like a start-up, but they are anything but a start-up.  Why do I say this? If you look at the numbers and think about what they are doing in a very business-model-entrepreneurial mindset, Netflix is doing something a lot of small companies end up doing.  They are still finding out who they are.  And for that reason, I don’t believe that Netflix has nailed its own coffin.

By splitting their streaming and mail delivery options (and potentially doubling the subscription price per user) they have only lost 1 million of their 25 million subscribers.  That’s not a killer loss.  As a strictly business issue, they could very well end up increasing their overall profitability.  Their move is what entrepreneurs like to call a pain-threshold test; they are re-evaluating and validating their products and subscription prices.

It’s all basic economics.  When your product is inexpensive, a lot of people will pay for it.  The more expensive it is, the fewer people will pay for it.  It’s really a simple supply and demand problem.  At some point in between the extremes, a maximum profit point exist.  Where that point is located exactly, that’s always ends up being an educated guess based on market research, testing, etc.  Like I mentioned earlier, they are doing what all start-ups do; they are figuring out how much people will pay for their products.  Unfortunately for them, their approach sucks and they will pay for it.

But that leaves another big question: why would they do something like this now?  They have had years to play around with price testing.  My guess is something major has changed within their revenue model; expenses.  With the quick transition that television and film has seen from DVDs to streaming, everyone wants a bigger piece of the pie.  And in that sense, Netflix is learning another lesson entrepreneurs often have to face, “Pioneers get slaughtered, Settlers prosper.”  It’s especially true in the tech world where no one knows what’s going to be big, how much people will pay, etc.

Back when Netflix was getting started, media producers and distributors viewed streaming media as an afterthought, a secondary way to gain a little profit with little extra cost on their end.  That being said, they didn’t make a huge deal out of making money off streaming media.  Now that it’s clearly become a major means of media distribution, there is a lot of pressure to milk it for all its worth.

But that change is exactly why I’m not ready to call Netflix done.  The fact is Netflix is better than the rest of its competitors.  Furthermore, the changes in cost structure are not isolated to Netflix, they are industry wide.  Unless media producers decide to pursue their own streaming solutions (can you imagine a world where you would have to use a different streaming service to watch shows for different networks?), every platform is going to face the issues Netflix is experiencing.  In other words, don’t count Netflix as dead.  Count them as overvalued because in my mind they still have the advantage over competitors.  And that’s big.

 

 

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