Netflix and the lesson of Kodak’s museum brand

November 5, 2011

We love like family brands we accept and use to organize our lives. We respond as people do when they are betrayed, whether it’s justified or not.

Netflix is one such brand.  The DVD-by-mail company built a loyal customer base of almost 25 million who loved the control of ordering movies via the web and watching at their convenience. For the last three years, it finished either first or second in a national survey of customer satisfaction with e-retailers. That’s an intense level of brand connection.

A high-profile series of botched efforts to separate its core DVD service from its newer, video-on-demand-style streaming library has destroyed much of that goodwill.

Insult was added to injury when Netflix practically declared that its core DVD-by-mail service was for Neanderthals who still feel weirdly attached to antiquated entities like the Postal Service. They were no longer eligible to be members of the Netflix club – they’d have to pay extra to use a service called Qwikster.

Twitter and the blogosphere were aflame with indignation. Appropriate scorn was heaped upon the name, although much of it missed the point. The stock tanked and more than 800,000 subscribers decided there were better alternatives. Now, while all this demonstrates a staggering ineptitude when it comes to understanding brands and the relationship people have with them, the pity is that, until this meltdown, Netflix was thinking intelligently about its future.

Buried in a mea culpa email Reed Hastings addressed to subscribers was the real burning platform issue that he is rightly concerned about.

Who's next?

“For the past five years, my greatest fear at Netflix has been that we wouldn’t make the leap from success in DVDs to success in streaming. Most companies that are great at something – like AOL dialup or Borders bookstores – do not become great at new things people want (streaming for us) because they are afraid to hurt their initial business. Eventually these companies realize their error of not focusing enough on the new thing, and then the company fights desperately and hopelessly to recover. Companies rarely die from moving too fast, and they frequently die from moving too slowly.”

The market that Netflix has had to itself is clearly changing. Digitization of content is laying waste to traditional industries that either can’t see the writing on the wall or choose to ignore it. Amazon and Apple between them have destroyed Borders, Blockbuster, Tower Records and (almost) Virgin Megastores. Netflix wants to be on the right side of this equation.

If there’s any company that keeps Reed Hastings awake at night it should be Kodak.

Here is a revered American company and, at one time, a powerful global brand brought to the brink of bankruptcy by its addiction to the fat margins of its core film business and its reluctance to change. Over the decades Kodak has displayed all the behavior of a company in the thrall of its own brand, which digitization has all but destroyed.

Founded in 1880 by George Eastman the company is struggling to complete a challenging transformation from a company reliant on a dying business to a seller of consumer and commercial printers. This from a company that invented the digital camera. The brand belongs in a museum.

In Clayton Christenson’s classic treatise “The Innovator’s Dilemma”, technology giants are frequently toppled by “disruptive” technologies that erode seemingly impregnable businesses, often with startling speed. This is partly because it’s easy for incumbents to dismiss the disruptive potential of a fledgling technology–a classic hazard of linear thinking–and partly because adapting to the new world would itself disrupt existing, and usually highly profitable, business relationships.

Netflix deserves some credit for trying to buck this trend. With the high fixed-cost DVD business on the verge of stagnation, the CEO took the almost unprecedented step of effectively blowing it up in order to speed the transition to streaming.

He’s also just received a valuable lesson brand management. Don’t count Netflix out.

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