by Gina Keating
The bloggers and their followers gained exponential power in the rise of the social networking movement, as consumers learned to take both compliments and complaints online and publicly demand redress. The blogs’ collective might spoke to and for consumers in a way that advertising could not match. They seemed to see everything. Companies may have looked down on them but certainly became too wise to ignore them, as both Netflix and Blockbuster soon learned.
At first, Kaltschnee posted about two or three times a week. His posts included short lists of newly released titles, cheerful links to news articles, and information about Netflix’s financial or stock performance. He quickly built up a community of frequent contributors, as well as visitors who came to the site to check out how to work new features, to scope for answers about changes in service, or to share experiences.
The link to Blockbuster Online’s beta test first turned up on HackingNetflix, courtesy of Cooper. Kaltschnee shared it with readers, but he noted that the new service appeared to be a poorly executed clone of Netflix.
As the online rental price war heated up, Kaltschnee wanted a way to communicate directly with Netflix to answer the hundreds of questions, comments, and tips he was getting about the competing services. The trouble was, Netflix wasn’t interested. He couldn’t even get on its media list. At first he took the rejection in stride, noting that the company’s press materials were available from other sources.
In mid-2004 he again approached the company, asking for information for a proposed Ask Netflix column he was putting together for his now ten thousand monthly visitors. He also asked for a tour of a Connecticut distribution center, promising “to keep this friendly (I do like you guys).” The company’s response was three lines long—again turning him down and wishing him luck with his site.
After much soul-searching, Kaltschnee shared the e-mails with readers.
“I know I’m not alone,” he posted a day or two later.
It’s hard to get companies to take bloggers seriously. I really like Netflix, but they are slowly withdrawing, closing themselves off from their customers (they recently removed their phone numbers from the site). Instead, companies should be embracing these online communities, comprised mostly of the highly desired “early adopters” that evangelize products to the general population.
The reaction from the blogger community was instant—condemning the company and setting off a heated discussion in the mainstream media about the brand bloggers’ place in the information ecosystem. Top outlets such as the New York Times and the Wall Street Journal began to quote Kaltschnee regularly, as a sort of consumer advocate. He was invited to be a panelist on an MSNBC show about brand bloggers.
Netflix finally contacted Kaltschnee a few days after his watershed posting. The company wanted to incorporate HackingNetflix and other blogs into its media plan, product marketing executive Michele Turner told him—it just wasn’t sure how they fit. Ensuing conversations resulted in the reinstatement of a consumer service phone number on the Netflix site and on Kaltschnee’s page, despite Dillon’s objections about the costs of live operators.
Kaltschee also joined Netflix’s affiliates program—and started getting a small bounty for each reader who became a Netflix subscriber. He saw his status at the company rise again early in 2005, when Ross and Swasey took over communications. While neither Ross nor Swasey had much to do personally with blogging or social networking, they understood the potential as an important communications channel.
At their first meeting, at a Starbucks in New York City’s Union Square, Ross found Kaltschnee personable, dedicated, and professional. He decided to treat HackingNetflix as a new type of media outlet—different from but on the same plane as the New York Times or Reuters. He granted Kaltschnee’s request for a tour of a distribution center, and he invited the blogger to interview Hastings in Los Gatos. Kaltschnee was thrilled. When he finally sat down with Hastings a few weeks later, with a long list of reader questions, Kaltschnee was so nervous that Ross had to stop the interview and urge him to take a few deep breaths to calm down.
But he was not shy about relaying his readers’ pointed questions about one issue that kept cropping up among heavy DVD users, one that had even begun bothering Kaltschnee. He called it throttling.
It seemed that Netflix was intentionally slowing down movie deliveries to a subset of subscribers, who complained about it vocally and for months before Kaltschnee agreed they might have a point. These users learned from talking among themselves that they probably fit the profile of subscribers that Netflix internally labeled “pigs”—the service’s heaviest users—who made up about 25 percent of the subscriber base.
“I am usually a very happy Netflix customer, but sometimes I get a bit frustrated with their allocation strategy,” Kaltschnee wrote on March 22, 2004.
I’ve been on “Long Wait” for Sofia Coppola’s hit Lost in Translation since it was released more than a month ago. Am I being punished for renting more movies than the average Netflix customer?
Two months later he was still waiting, but by this time, readers had started talking to each other about similar experiences. A poster named Eli wrote:
I’m not sure they are being totally honest about how their waiting system works. It would be in Netflix’s best interest to get the movies to people who just put it in their queue, rather than those who had been waiting.
The complaints, and the realization that certain subscribers were being singled out, spurred the late 2004 filing of a class action lawsuit by a San Francisco subscriber that eventually forced Netflix to admit that it gave priority to customers who rented fewer DVDs when inventory was tight. This system helped retain the infrequent renter, known to Netflix as “birds” while putting the brakes on renting by the expensive “pigs.”
A few months later, Kaltschnee noticed that the Blockbuster store near his home in Danbury, Connecticut, was refusing to honor the corporation’s End of Late Fees promotion. Dozens of his readers related similar experiences at nearby Blockbusters. It was their observations—amplified by the media—that captured the attention of attorneys general in forty-eight states who filed the lawsuits against Blockbuster alleging false advertising.
Both Netflix and Blockbuster settled their blog-incited lawsuits out of court by doling out free rentals to subscribers. Although they had made no admission of wrongdoing, the experience planted a strong incentive for both companies to pay closer attention to what their customers were saying online—a lesson that Kaltschnee later worried that Hastings had not taken to heart.
Hastings admitted to reading HackingNetflix, but he cautioned his executives against taking it too seriously. It overrepresented people with a passionate interest in Netflix, he said.
While this was probably true, Kaltschnee thought it was a mistake for the company to discount feedback from its most loyal followers; the way they used the Internet had a way of amplifying things until they were impossible to ignore, as Netflix’s subsequent attempts to cancel two popular Web site features showed.
Practically every source of consumer data had shown marketing and analytics chief Joel Mier and product manager Chris Darner that Netflix subscribers wanted to split their queues so that each member of a family could manage separate movie selections. The idea made sense. Data from separate Queues made Cinematch recommendations more accurate and the subscriber experience better. Hastings resisted the idea, describing it as a barnacle that would impede every programming decision that followed. If subscribers wanted multiple queues per household, let them buy separate subscriptions, he said.
Following entreaties from Mier and Darner, Hastings allowed queue splitting, but he insisted that it be built as cheaply and simply as possible—the easier to disassemble when it failed. The feature, called Profiles, launched in 2005 with little fanfare, and as a result, first attracted a small subset of passionate users from the subscriber ba
se.
At around the same time, Hastings incorporated a feature called Friends into the Netflix Web site as an answer to the rising popularity of social networks. Since federal privacy laws prevented Netflix from sharing customers’ rental data publicly, any Queue sharing had to be done among subscribers. The feature was also thought to fill a customer retention role. Netflix’s focus groups indicated that people were more likely to rent or purchase movies, and enjoy them more, when they shared the experience with friends.
Even so, Friends, like Profiles, gained only a small following—10 percent or less of subscribers—during its six-year existence, since many subscribers said they felt uncomfortable sharing their movie picks.
• • •
IN 2008 HASTINGS decided to deactivate Profiles. The company put users on notice with a curt post on the company’s blog, and readers of HackingNetflix unleashed a vocal and unrelenting protest.
A poster named Lisa wrote:
This is the most non-customer friendly thing I’ve seen Netflix do to date. No way is this an improvement to customers.
A poster named Mike wrote:
Wow, what on earth are they thinking? I’ve been a member since 2004 and this is the first time I’ve considered switching.
The posters escalated their complaints, asking New York Times technology columnist David Pogue to investigate Netflix’s decision. Pogue found Swasey’s initial explanation—Profiles gummed up the Web site’s programming—“uninformative and patronizing.”
Ten days later, Netflix product manager Todd Yellin wrote on Netflix’s blog that the company had reversed course on its decision to kill Profiles.
Listening to our members, we realized that users of this feature often describe it as an essential part of their Netflix experience. Simplicity is only one virtue and it can certainly be outweighed by utility.
Despite Yellin’s apology, Kaltschnee didn’t think Netflix understood the message its subscribers were sending, and when the company abruptly canceled Friends twenty months later, in 2010, he was sure of it. The company eliminated the feature with no warning or explanation as part of a Web site redesign, and its small band of devotees turned to Kaltschnee to set things right. In the uproar that followed, Yellin again admitted to “fumbling the ball.”
We’ve read every blog post, Tweet, news article, call log to Customer Service by those of you who are upset about this decision. To you we apologize for not being more upfront earlier.
This time there would be no reprieve.
We decided to move engineering development time and resources from a little used feature to support and maintain the things that benefit all Netflix members as the service evolves.
Kaltschnee was troubled to learn that Swasey had protested the decisions to kill both features without first relating the reasons—or even the news of it—to users and had not been listened to. Kaltschnee agreed that the features had to be eliminated for the good of the service, but he did not understand why the company had not felt the need to explain that to its subscribers.
“When people are really passionate about something, you have to tell them the story of why you’re taking it away, and how that will make their lives better someday,” he told Swasey.
The cancellations of Profiles and Friends exposed a growing fault line between marketing and engineering in Netflix’s decision making. A drive for technological advance for its own sake seemed to have replaced the desire to understand customers’ needs and meet them. Kaltschnee worried that the episodes reflected a hubris and stubbornness that led Hastings to turn a deaf ear to his customers when he became impatient with the pace at which his vision for Netflix was unfolding.
Hastings prevailed in the end, and quietly eliminated Profiles in 2010 with no explanation and no protest. By then, Netflix’s video-streaming service had nearly eliminated subscribers’ need to maintain Queues, and that feature died a natural death.
The news was disheartening for Kaltschnee. Was Hastings learning anything from the extraordinary access he had to his customers through forums like HackingNetflix? He hoped so, but he was starting to doubt it.
CHAPTER NINE
THE BEST YEARS OF OUR LIVES
(2005–2006)
AFTER ANTIOCO DROPPED BLOCKBUSTER’S BID for Hollywood Video, a furious Icahn immediately took aim in the press. Antioco began to ignore his demanding phone calls: When the irate billionaire placed his customary closing-time call to Blockbuster headquarters, Antioco had his secretary routinely say that he had left for the day.
The tactic backfired when Icahn vowed to add Antioco to his wall of shame—by stripping him of his chairmanship, and possibly his job, in a proxy fight at Blockbuster’s May 11 annual meeting in Dallas. Antioco began to think he had made a mistake in not trying harder to placate Icahn, just to get rid of him. But it was too late; things had gone too far. A couple of weeks before the meeting, shareholder advisory services Glass Lewis and International Shareholder Services conditionally endorsed Icahn’s slate—consisting of himself and media executives Strauss Zelnick and Edward Bleier—over Antioco and two sitting directors whose terms had expired. The firms advised shareholders to put Zelnick and Bleier on the board, but if possible, withhold votes from Icahn, as his patent animosity toward Antioco and Blockbuster’s executive team would be detrimental to the company.
The tension came to a head on Blockbuster’s May 6 earnings conference call, when Icahn and Antioco got into a six-minute argument, as analysts and journalists listened in.
“Are you willing to agree that if these initiatives don’t work, and things don’t work out, that you would allow your whole board to be up for election next year, so that the shareholders would have the right to remove the board if they so wished?” Icahn asked.
“That’s not up to me to make that decision. The board will make that decision, so that’s the best answer I can give you,” Antioco shot back.
Finally, Antioco had the operator cut Icahn off in midsentence.
Antioco enlisted corporate communications chief Karen Raskopf to do damage control—to respond to the Glass Lewis and ISS recommendations against him and his directors. Blockbuster’s top management sought a compromise the night before the annual meeting, in negotiations that lasted until 2:00 A.M. and resumed at 8:00 A.M.—but it was too late.
In a stunning upset, Icahn and his two dissident directors captured 77 percent of the vote from Blockbuster’s shareholders at the May 11 meeting, with a coalition of Icahn and his hedge fund cohort tipping the balance. Blockbuster employees who attended the meeting in the Renaissance Tower auditorium emerged shocked, some in tears. Antioco, who had been stripped of his chairmanship, vowed to trigger his $54 million severance package over the material change in the terms of his employment.
“I’d be lying if I told you this is a happy day, because it is not,” Antioco said. “But we’ll roll with the punches.”
In response to Antioco’s threat, the Blockbuster board voted to create an eighth board seat to restore the chief executive to his chairmanship. Icahn also reiterated that he and his directors would not attempt to block the online and late fees strategies.
Blockbuster’s share price reacted by swinging upward, but the next day, the two main corporate-debt ratings agencies, Fitch and S&P, cut the company’s credit rating deep into junk territory on concerns about its mounting debt and increased competition.
• • •
ERICH ZIEGLER WAS at a Super Bowl party in early 2005 when a Blockbuster Online commercial filled the screen at his friend’s house in Silicon Valley. When it ended the other partygoers turned to him and asked if Netflix was nervous about Blockbuster’s expensive advertising assault.
“I would have spent that money a million different ways,” Ziegler said. “I’m not scared at all.”
Ziegler had created a complex and sophisticated spreadsheet p
rogram that he called the FlexFile to keep up with demands from his boss, Leslie Kilgore, for information and projections about how well Netflix’s marketing plan was working. The beauty of FlexFile was its ability to take a stub of data—say, a week’s worth of responses to a particular ad—and extrapolate the projected results for a month, a quarter, and a year.
It broke down every marketing channel where Netflix ran ads—radio, TV, billboards, online—to project its cost per acquisition, lifetime subscriber value, and number of acquisitions. It calculated revenue, cancellations, and numbers of subscribers that Netflix would pick up from a particular configuration of advertising.
Using this tool, Ziegler would correctly predict Netflix’s marketing costs and subscribers for sixteen straight quarters. FlexFile was better than a crystal ball, and in Ziegler’s mind, it eased the pressure-cooker environment that Netflix executives lived in as the fight against Blockbuster grew even more intense. Ziegler used FlexFile to analyze Blockbuster’s marketing plan and noticed what he considered costly mistakes—errors Netflix had made long ago and learned from. One of these was getting involved with affiliate coupon and rebate sites that took a high bounty for every customer they referred. The sites had terrible retention and high levels of fraud. He reveled in the fact that cash-strapped Blockbuster kept pouring money into them.
But for all their mistakes, Blockbuster was attracting a growing proportion of subscribers with its expensive ad campaign and generous coupon offers. Netflix had to have an answer for that value proposition.
Kilgore saw only one way to compete on price without sacrificing vital marketing dollars—rolling out a family of subscription plans with prices starting at $9.99 a month for a one-DVD at a time unlimited rental. That announcement, combined with McCarthy’s disclosure in April that Netflix’s return to profitability would be delayed by a quarter because of Blockbuster’s stronger than anticipated onslaught, drew criticism from Wall Street analysts, who worried that Netflix subscribers would flock to the cheaper plans.