Netflixed

by Gina Keating

  One evening that spring, as they sat in the Renaissance Tower offices wrestling with how to use the stores to gain an advantage over Netflix, Antioco turned to Evangelist and said, “Put a free rental coupon on the mailer. Just print the coupon on the mailer and have them bring the mailer into the stores for free rentals.” Instead of counting disks rented at the Blockbuster stores against a Blockbuster Online subscribers’ rental plan, the stores would simply give them the free store rentals that they were already entitled to as part of their monthly subscriptions, when they returned a disk in its mailer. The coupon printed directly on the mailer would include a bar code with the subscriber’s account information. When store employees swiped it at the cash register, the next DVD in the subscriber’s queue would be released—after the accumulated data was uploaded in the stores’ nightly satellite feed. The stores then would mail the DVDs to Blockbuster Online’s distribution centers, where they would be checked back in.

  The program wasn’t exactly the integrated service Evangelist had envisioned, but it obviated a full-scale integration of the two systems and produced the hybrid offer that his studies and consumers said could beat Netflix.

  Most important, the proposition was simple for consumers to understand: rent in the stores or online for one fixed monthly price.

  A test conducted in July in Colorado Springs, Raleigh, and Fresno in spring 2006 produced the results they had been looking for—a melding of the deep online DVD catalog and stores’ convenience that would drive traffic and online sign-ups past Netflix.

  Four weeks into the test Evangelist and Cooper flew into Colorado Springs to observe the program in action. They pulled up to a Blockbuster store near the heart of the little mountain city early on a weekday afternoon to chat with the manager to find out what customers thought about the program. The store was a few blocks down from a Hollywood Video, and right away, before they even got out of their rental car, Evangelist noticed something strange and exciting.

  The Hollywood Video store was nearly deserted—a normal sight on a weekday afternoon—but the Blockbuster store was hopping. A light but continuous stream of customers flowed in and out, all of them clutching yellow-and-blue Blockbuster Online mailers when they arrived. The store manager confirmed that what they were seeing was not a fluke. Since the promotion started, store traffic and sign-ups to Blockbuster Online from the store’s laptop were soaring.

  Evangelist was so astonished that he called Antioco, on vacation in Mexico, to tell him about the test. Blockbuster’s market research team considered Colorado Springs a bellwether market, and the tests underway in Fresno and Raleigh confirmed it—they were returning the same results. Antioco hopped a private plane to Colorado Springs the next day to see the spectacular midweek store traffic for himself.

  The hybrid program, dubbed Total Access, addressed every problem Antioco had been trying to solve since 2001: the overbuilt store base; the store inventory problems; the struggle to win back market share from Netflix. It would come at a steep cost.

  Antioco immediately ordered Total Access rolled out nationwide in time for the holiday season. Karen Raskopf hired one of Hollywood’s most eye-catching yet relatable stars—Texan Jessica Simpson—to promote Total Access at an event on Hollywood’s Walk of Fame, in front of the home of the Academy Awards, the Kodak Theatre (later renamed the Dolby Theatre). Blockbuster officially launched Total Access on November 2, 2006.

  I never passed up an opportunity to see a CEO of a company I covered, so I made plans to talk with Antioco and Evangelist after the event. The blond and cheerfully plastic Simpson, whom Antioco declared “embodies entertainment,” did her part, vamping for press cameras and soaking up the palpable adoration of fans and blue-shirted Blockbuster employees. She thanked Blockbuster for inventing two great ways for her to celebrate “movie night . . . with my girls and my girly guys and Daisy,” her Maltese pooch.

  Backstage, Antioco looked elated and relieved—like a man still absorbing his escape from certain death. He and Evangelist—who reminded me of almost a father and son in the similarity of their wiry, compact statures and barely leashed energy—were all smiles and swagger in our brief interview, and I came away reminded that, for all its recent woes, Blockbuster was more than capable of crushing Netflix.

  Total Access was pretty simple, but ingenious. If Blockbuster had truly gotten its act together, this could spell trouble for Netflix, which had just surpassed six million subscribers. Blockbuster had had to abandon its stated goal of two million online subscribers the previous year, and Antioco wanted to use the engine of Total Access to make good on that forecast before the end of 2006, just six weeks hence. Shortly after the program was launched, he called in Nick Shepherd to talk about how to get there with the stores’ help.

  Shepherd’s role at Blockbuster as executive vice president and president of international operations was finding practical ways to carry out Antioco’s big ideas, and he was good at his job. He prided himself on curbing Antioco’s more exuberant and expensive propositions, such as the plan Antioco now proposed: spending $6 million in incentives to encourage Blockbuster store managers to push Total Access over the crucial holiday quarter.

  Both Antioco’s and Shepherd’s annual bonuses were riding partly on Blockbuster Online reaching two million subscribers by the end of the year, but Shepherd was sure he could meet the target for far less money.

  “I don’t like what you do. You don’t want to spend money,” Antioco told him during a morning jog along the Katy Trail, a hike-and-bike trail that winds through Dallas’s posh Oak Lawn suburb. “Sometimes I’m not sure you’re thinking big enough.”

  “Do you want the target met?” Shepherd responded.

  Antioco agreed to let Shepherd use his own methods, and let the matter drop.

  The integrated subscription program formed a two-pronged attack on both Netflix and Hollywood Video, by grabbing customers from both companies. In a roundabout way it would accomplish what Antioco had tried to do with his bid for Hollywood Video in 2004—winnow the U.S. store base down by almost 50 percent.

  It had been a tough sell to store managers and Blockbuster corporate staff, who had seen store rentals dropping with no end in sight, and endured cost cuts totaling more than $450 million over three years to fuel the online business. The store staff finally appeared to accept what Antioco and Shepherd had been preaching for two years: The age of the video store was over. Hitching their stores to the online service and reaping fees from Total Access exchanges was their only play.

  In the end, it cost Blockbuster only the price of the MINI Cooper that Bevin had demanded if he hit the target. Bevin stayed on the road from Total Access’s launch day to Christmas Eve, touring corporate stores to cajole, exhort, and threaten managers to meet their numbers. In the end, customers decided the matter, responding in droves to Blockbuster’s marketing blitz, which delivered 750,000 new subscribers in six weeks.

  Shepherd bought the car with his corporate American Express card and delivered it to Bevin’s house on Christmas Eve with a giant red bow tied around it. They had surpassed two million subscribers, and there seemed no limit to how fast they could grow

  • • •

  IT FELL TO Ken Ross to infuse Netflix with the credo that great brands had to connect with consumers on a personal level. Making an emotional bond with Netflix’s subscribers would seal the deal that stellar service, Cinematch, and enthusiastic word of mouth teed up for the little company, Ross knew. As Randolph’s influence had waned, Netflix’s marketing efforts had focused on a rational connection with consumers—with the best software, logical interfaces, and a peerless DVD selection, why wouldn’t consumers choose Netflix? It was a realm where Hastings and Kilgore ruled.

  Ross’s idea was to harness the allure of movies and movie stars to confer their magic on Netflix’s brand. He produced Netflix’s Rolling Road Show to dust loyal subscribers and
the media with some of that magic: a series of movie screenings at famous outdoor filming locations. To persuade megastars like Kevin Costner, Bruce Willis, Kevin Bacon, and Dennis Quaid to lend their wattage to Netflix, Ross came up with a clever quid pro quo.

  Each of the actors he selected also headlined his own rock band. In exchange for appearing at the screening, the Rolling Road Show would include a full-scale concert by each band. The temptation to play in compelling outdoor settings to their most devoted fans with banks of cameras trained on them was too much to resist—as Ross knew it would be.

  The first event, in Dyersville, Iowa, celebrated the twentieth anniversary of Field of Dreams, a nostalgic baseball film starring Kevin Costner. The spectacle of Costner returning to the field where he filmed the iconic movie, picnicking and shagging baseballs with fans, and rounding out the evening by playing a concert with his band, Kevin Costner and His Band, was irresistible to the world entertainment press—and to local Iowans. The concert and screening attracted more than seven thousand people, and the Iowa State Patrol had to close the road leading to the venue.

  Netflix screened Jaws on Martha’s Vineyard and brought Willis to NASA’s Cape Canaveral space center to celebrate Armageddon and play with his band, The Accelerators. Quaid and his band, The Sharks, serenaded fans of The Big Easy on the banks of the Mississippi in New Orleans, and Bacon celebrated his 1982 coming-of-age film, Diner, with a screening and concert with his band, The Bacon Brothers, on Baltimore’s Inner Harbor.

  When streaming became Netflix’s sole marketing focus, Ross wound up the promotion with a concert and screening of The Wizard of Oz in New York’s Central Park, in a partnership with Warner Brothers in which Netflix subscribers could stream the classic film for free for twenty-four hours after the event. Oscar winner Jennifer Hudson performed “Somewhere Over the Rainbow” on a concert stage in Central Park’s Rumsey Playfield.

  The Rolling Road Show and the press it generated did more than reinforce the positive feeling about Netflix that put the company on the tops of consumer satisfaction surveys year after year—it invested the brand with the excitement and sense of voyage that has always accompanied the experience of going to the movies. That visceral response to a company was hard-won and powerful—but not easy to quantify through algorithms or spreadsheets. Ross, perhaps alone among Netflix’s executive team, understood that a customer’s feeling about a company could decide whether she stayed and paid, month after month.

  His was the voice now pushing back against the numbers and the logic.

  He and Sarandos grabbed onto the burgeoning independent film movement—with its antiestablishment drive to democratize moviemaking—as a means to align Netflix with young indie filmmakers and stars, and to define the brand as hip yet serious and outside the mainstream. Consumers may not have noticed the unmistakable red logo in the backdrop—of red carpet photos of their favorite celebrities at the Independent Spirit Awards and the Sundance Film Festival—but Netflix was suddenly everywhere that the stars partied.

  Ross kept improving on his strategy of doing good for Netflix by doing right in the eyes of consumers and the movie industry. He persuaded director Martin Scorsese to recruit four famous friends to design artwork for Netflix’s mailers for the holiday season—in exchange for a donation to Scorsese’s film preservation charity, The Film Foundation. The designs, by Scorsese and his eleven-year-old daughter, Francesca, actors Orlando Bloom, Charlize Theron, and Leonardo DiCaprio, and director Peter Jackson, debuted at a press conference at the Directors Guild of America in Los Angeles hosted by Kilgore. The glowing coverage tied the company ever closer to the magic of movies.

  “The red mailer, which is one of the most visible expressions of our brand, was a natural way to showcase our partnership with the Film Foundation and express our holiday spirit,” Kilgore told the entertainment press. “It’s gratifying to us to support the important work of the Film Foundation, which, like Netflix, is committed to preserving the heritage of film and helping it find new audiences.”

  For all his success in positioning Netflix as a top underdog brand, cool and mighty with an ironic wink, Ross knew the company had a problem the moment he read about Total Access in a posting on HackingNetflix in spring 2006. Netflix’s own industry informants confirmed the results of the Total Access market test in Colorado Springs.

  Ross had helped PepsiCo ease the number two cola brand away from a communications strategy that emphasized price instead of a camaraderie with young consumers during his long career there. Everyone knew about Pepsi and Coca-Cola; consumers were looking for reasons to embrace one brand over the other when the cola wars broke out in the 1980s. By positioning itself as “The Choice of a New Generation,” Pepsi attempted for the first time to ally itself with soda drinkers instead of its own product—a bond that proved critical when Coca-Cola rolled out its New Coke formula in 1985.

  Internal studies showed Pepsi that consumers liked the new, sweeter drink better than either Pepsi or Coke’s original formula. With no answer to a clearly superior product, Pepsi set about trying to sabotage New Coke—to make it disappear from the marketplace. Fortunately, Coca-Cola had underestimated its customers’ attachment to the idea of the ninety-nine-year-old original formula, and Pepsi fanned their outrage in ads showing Coke drinkers complaining, “They changed my Coke.”

  “I stuck with them through three wars and a couple of dust storms, but this is too much,” grumbled one of the three actors costumed as old codgers sitting outside a barn, as he cracked open a cold Pepsi.

  Pepsi never had to compete against the new formula, because Coca-Cola pulled it from the shelves just two months after its introduction.

  In Total Access, Ross believed he had another version of that battle on his hands. Netflix had no answer for a consumer proposition that offered the convenience of stores with the matchless selection online delivered, but the cola wars had taught him that consumer sentiment would play no small part in the outcome.

  Blockbuster Online’s obvious strategy would be to paint Netflix as “The Wait Company,” and if it somehow found the funds to sustain the free store rentals for more than a few months, Netflix was dead. They had to find a way to make Total Access disappear, because Ross could think of no good way to counterprogram.

  The subscriber growth numbers, when they began to come a few weeks after Total Access launched, confirmed Ross’s fears. For almost as long as Blockbuster had been in online rental, Netflix reliably signed up 70 percent of new subscribers to Blockbuster’s 30 percent. Total Access reversed that market share split in a matter of weeks.

  Kirincich and Ziegler examined Blockbuster’s costs and debt and concluded that Antioco could keep Total Access going for as long as two years without running into serious financial trouble. If Netflix kept shedding subscribers, its share price could collapse long before that, perhaps leading to a demoralizing death spiral.

  Total Access was cleaning inventory out of Blockbuster stores, and Kilgore’s spies—local marketing and DVD wholesalers—told them that store franchisees hated the promotion and were beginning to mutiny.

  Inside Netflix, the atmosphere was grim. Hastings had hoped to move his base of operations to Rome for a year to be with his wife and children, who were studying abroad. Instead, he was flying back and forth to Europe once a month, and the exhaustion from those flights and the dilemma over Total Access began visibly to wear on him.

  Kilgore began haunting the sidewalk outside her local Blockbuster store to interview Total Access customers. “They really like this,” she told her team worriedly. It was clear that she was rattled—much more so than three years earlier, when Blockbuster had cut its prices to $14.99.

  McCarthy urged everyone to stay calm. If they stuck to the task of optimizing their operations and executing their business plan brilliantly, they would win. They debated dropping their prices again on some plans, but the models di
d not show enough of a long-term benefit. McCarthy rolled out his financial models to argue for tabling the price cuts for at least a month. Hastings overruled him, tense about shareholders’ reaction to Netflix’s ceding its advantage in subscriber growth to Blockbuster for so long.

  “Your spreadsheet math is bullshit,” Hastings said. “We won’t know ’til we know, so let’s just try it.”

  McCarthy renewed his quiet talks with his own investors and with analysts who covered Blockbuster about the impact Total Access was having on the big company’s balance sheet. Ross set up meetings for McCarthy with select financial journalists to try to get some traction on a story about Blockbuster’s impending debt implosion.

  The Total Access promotion generated significant attention from Wall Street analysts, who overlooked the program’s steep costs and concluded that it finally would put Blockbuster back where it belonged—on top of store-based rental and ahead of Netflix. At Marathon Partners, Cibelli again staked out a contrarian view, warning his partners and investors in an internal note that “in its current state, the Total Access initiative is unsustainable over the long term.” Blockbuster had converted in-store customers to less profitable online customers to meet its year-end targets and generate buzz for the program: “In-store customers are Blockbuster’s most profitable patrons, so near- and longer-term profitability is sacrificed,” Cibelli wrote.

  The promotion would end either by driving Netflix out of business or with Blockbuster modifying the terms of Total Access to run it profitably, and Cibelli, who planned to hold on to his Netflix stock, was betting on the latter.

  • • •

  NETFLIX STILL HOPED to somehow make twenty million subscribers by 2012, but Hastings began distancing the company from that forecast. Netflix and Blockbuster would now split the $8 billion rental market, and there was plenty of profit for both, he now said.