CASE 12

Netflix, Inc.
The 2011 Rebranding/Price Increase Debacle
Alan N. Hoffman
Bentley University

In 2011, Netflix was the world’s largest online movie rental service. Its subscribers paid to
have DVDs delivered to their homes through the U.S. mail, or to access and watch unlimited
TV shows and movies streamed over the Internet to their TVs, mobile devices, or comput-
ers. The company was founded by Marc Randolph and Reed Hastings in August, 1997
in Scotts Valley, California, after they had left Pure Software. Hastings was inspired to
start Netflix after being charged US$40 for an overdue video.1 Initially, Netflix provided
movies at US$6 per rental, but moved to a monthly subscription rate in 1999, dropping
the single-rental model soon after. From then on, the company built its reputation on the
business model of flat fee unlimited rentals per month without any late fees, or shipping
and handling fees.
In May 2002, Netflix went public with a successful IPO, selling 5.5 million shares of common
stock at the IPO price of US$15 per share to raise US$82.5 million. After incurring substantial
losses during its first few years of operations, Netflix turned a profit of US$6.5 million during the
fiscal year 2003.2 The company’s subscriber base grew strongly and steadily from one million in
the fourth quarter of 2002 to over 27 million in July 2012.3
By 2012, Netflix had over 100,000 titles distributed via more than 50 shipment centers, in-
suring customers received their DVDs in one to two business days, which made Netflix one of
the most successful dotcom ventures in the past two decades.4 The company employed almost
4100 people, 2200 of whom were part-time employees.5 In September 2010, Netflix began
international operations by offering an unlimited streaming plan without DVDs in Canada. In
September 2011, Netflix expanded its international operations to customers in the Caribbean,
Mexico, and Central and South America.
Key to Netflix’s success was its no late fee policy. Netflix’s profits were directly proportional
to the number of days the customer kept a DVD. Most customers wanted to view a new DVD
release as soon as possible. If Netflix imposed a late fee, it would have to have multiple copies of
the new releases and find a way to remain profitable. However, because of the no-late-fee rule,

The authors would like to thank Barbara Gottfried, Ashna Dhawan, Emira Ajeti, Neel Bhalaria, Tarun Chugh, and Will
Hoffman for their research and contributions to this case. Please address all correspondence to: Dr. Alan N. Hoffman, Dept.
of Management, Bentley University, 175 Forest Street, Waltham, MA 02452-4705, voice (781) 891-2287, ahoffman@
bentley.edu. Printed by permission of Alan N. Hoffman.
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the demand for the newer movies was spread over a period of time, ensuring an efficient circula-
tion of movies.6
On September 18, 2011, Netflix CEO and co-founder Reed Hastings announced on the
Netflix blog that the company was splitting its DVD delivery service from its online stream-
ing service, rebranding its DVD delivery service Qwikster as a way to differentiate it from
its online streaming service, and creating a new website for it. Three weeks later, in response
to customer outrage and confusion, Hastings rescinded rebranding the DVD delivery service
Qwikster and reintegrating it into Netflix. Nevertheless, by October 24, 2011, only five weeks
after the initial split, Netflix acknowledged that it had lost 800,000 U.S. subscribers and ex-
pected to lose yet more, thanks both to the Qwikster debacle and the price hike the company
had decided was necessary to cover increasing content costs.7
Despite this setback, Netflix continued to believe that by providing the cheapest and best
subscription-paid, commercial-free streaming of movies and TV shows it could still rapidly
and profitably fulfill its envisioned goal to become the world’s best entertainment distribution
platform.

Online Streaming
By the end of 2011, Netflix had 24.4 million subscribers, making it the largest provider of online
streaming content in the world.8 Subscription numbers had grown exponentially, increasing 250%
from 9.3 million in 2008. At the same time, Netflix proactively recognized that the demand for
DVDs by mail had peaked, and the future growth would be in online streaming. With 245 million
Internet users in the U.S., and 2.2 billion9 worldwide, Netflix saw the opportunity to expand its
online streaming base both domestically and internationally to become a dominant world player.
In 2011, Netflix expanded into Canada and Central America, and in 2012 into Ireland and the
United Kingdom.10
The scarce resource for the online video industry was bandwidth, the amount of data that
can be carried from one point to another in a given time period.11 With the introduction of
Blu-ray discs, the demand for higher- and better-quality picture and sound streaming increased,
which in turn increased the demand for higher bandwidths. At the same time, cheaper Internet
connections and faster download speeds made it easier and more affordable for customers to take
advantage of the services Netflix and its competitors offered. If the cost of Internet access was to
increase, it would directly affect sales in the industry’s streaming segment.
Netflix was a leader in developing streaming technologies, increasing its spending on
technology and development from US$114 million (2009) to US$258 million in 201112 (8% of
its revenue),13 and initiating a US$1 million five-year prize in to improve the existing algorithm
of Netflix’s recommendation service by at least 10%. Because Netflix had already developed
proprietary streaming software and an extensive content library, it had a head start in the online
streaming market, and with continued investments in technological enhancements, hoped to
maintain its lead.14 However, increased competition in streaming, ISP fair-use charges, and
piracy were some of the major challenges it faced.
In March 2011, Netflix made its services readily available to consumers through Smart-
phones, tablets and video game consoles when only 35% of the total U.S. market were using
Internet-enabled Smartphones.15 Thus, the expansion potential for Netflix in this market was
substantial. The Great Recession of 2008–2010 was a boon for Netflix as people cut down on
high-value discretionary spending, choosing “value for money” Internet offerings instead.16
However, in its annual letter to shareholders, Netflix acknowledged that many of its customers
were among the highest users of data on an ISPs network and in the near future it expected that
such users might be forced to pay extra for their data usage, which could be a major deterrent
for the growth of Netflix because most of its customers are highly price sensitive.

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 Case 12  Netflix, Inc. 511

Demographics
The number of Internet users in the United States had increased from about 205 million in
2005 to 245 million in 2012.17 According to a research report by Mintel investment research
database, the percentage of people using the Internet to stream video has jumped from 5%
(2005) to 17% (2011), significantly growing the market for online streaming services such as
Netflix. At the same time, the recession of 2008–2010, with its high unemployment and slow
economic growth had a significant impact on the spending habits of U.S. consumers. More
and more people chose to forego an evening at the movie theatre in favor of home movie rent-
als to save on costs.18 By 2011, the crucial 18- to 34-year-old demographic saw the Internet
as its prime source of access to entertainment. However, this demographic, was particularly
sensitive to price fluctuations. When Netflix changed its pricing structure in the third quarter
of 2011, subscriptions immediately dropped off 3%. Mintel Research reported that only 15%
of the under 18–25 age bracket of its customers were ready to pay US$16/month for premium
content via Netflix. In addition, the proliferation of free content over the Internet—Mega
video, for example, with around 81 million unique visitors and a maximum exposure in the
18–33 demographic became a strong competitor for Netflix, further limiting the pricing power
Netflix could exercise.19
The Mintel report also found that American households with two or more children and a
household income of US$50,000 or more had a very favorable attitude toward Netflix;20 Netflix
fostered this trend by cutting a deal with Disney21 that gave it access to content exclusively
targeting young children.
At the same time that Netflix was increasing its customer base among the 18- to 34-year-olds
and households with young children, both of whom preferred streaming, it lost ground with afflu-
ent Baby Boomers who still preferred to rent the DVDs over the Internet. Thus, Netflix needed
to fine-tune its strategy to include this older demographic since people over 60 had US$1 trillion
in discretionary income per year, and fewer familial responsibilities, making them a prime target
demographic for expanding Netflix’s customer base.22
The availability of high-speed Internet at home and the shift to online TVs created
opportunities for Netflix. The company recognized that to fully leverage the current world
of technological convergence, it needed to compete on as many platforms as possible, and
created applications for the Xbox, Wii, PS3, iPad, Apple TV, Windows phone, and Android.
The company also collaborated with TV manufacturers to integrate Netflix directly into the
latest televisions.23

Netflix’s Competitors
Netflix’s great operational advantage in the DVD rental market was its nationwide distribution
network, which prevented the entry of many of its potential competitors. While only Netflix
provided both mail delivery and online rentals, with the growth of online streaming, Netflix’s
advantage shrank and it faced increasing competition from Blockbuster, Wal-Mart, Amazon,
Hulu, and Redbox.
Netflix’s one-time strongest competitor, Blockbuster LLC, founded in 1985, and head-
quartered in McKinney, Texas, provided in-home movie and game entertainment, originally
through over 5000 video rental stores throughout the Americas, Europe, Asia, and Australia,
and later by adding DVD-by-mail, streaming video on demand, and kiosks. Its business model
emphasized providing convenient access to media entertainment across multiple channels,
recognizing that the same customer might choose different ways to access media entertain-
ment on different nights. Competition from Netflix and other video rental companies forced

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Blockbuster to file for bankruptcy on September 23, 2010, and on April 6, 2011, satellite
television provider Dish Network bought it at auction for US$233 million.24
Redbox Automated Retail, LLC, a wholly owned subsidiary of Coinstar Inc., specialized
in DVD, Blu-ray, and rentals via automated retail kiosks. By June 2011, Redbox had over
33,000 kiosks in over 27,800 locations worldwide,25 and was considering launching an online
streaming service, perhaps for as cheaply as US$3.95 per month.
Vudu, Inc., formerly known as Marquee, Inc., founded in 2004, a content delivery media
technology company acquired by Wal-Mart in March 2010, worked by allowing users to
stream movies and TV shows to Sony PlayStation3, Blu-ray players, HDTVs, computers, or
home theaters. VUDU Box and VUDU XL provided access to movies and television shows;
users also needed a VUDU Wireless Kit to connect VUDU Box/VUDU XL to the Internet.
Based in Santa Clara, California, the company was the third most popular online movie ser-
vice, with a market share of 5.3%.26 Vudu had no monthly subscription fee, instead users
deposited funds to an online account which was reduced depending on how many movies the
user rented. In other words, you paid for only what you watched.
In February 2011, Amazon.com, a multinational electronic commerce company, announced
the launch for Amazon Prime members of unlimited, commercial-free instant streaming of all
movies and TV shows to members’ computers or HDTVs. In addition, Amazon Prime members
were given access to the Kindle Owners’ Lending Library, allowing them to borrow selected
popular titles for free with no due date. For non-Amazon Prime members, 48-hour on-demand
rentals were available for US$3.99, or the title could be bought outright.27
Hulu Plus was the first ad-supported subscription service for TV shows and films that
could be accessed by computers, television sets, mobile phone, or other digital devices. Like
Netflix, the streaming service cost US$8 per month, but unlike Netflix, Hulu offered more re-
cent TV episodes and seasons. However, subscribers had to put up with ads, and Hulu’s movie
selection was much more limited than Netflix’s selection.
Marc Schuh, an early financial backer of Netflix, observed that copying software
was relatively simple.28 Anyone could buy the best servers, processors, operating systems,
and databases—but timing was crucial.29 Barnes & Noble waited 17 months to enter the fray
against Amazon, so that by 2012, Amazon had eight times the profit and 30 times the market
capitalization of Barnes & Noble. Similarly, in the same year that Netflix’s profits increased
sevenfold, Blockbuster lost over one billion dollars.30 Technology with correct timings can
help a company gain competitive advantage over rivals. Other barriers to entry include invest-
ments in infrastructure aiding supply chain and delays from major production houses for gain-
ing permission to stream their titles.

Rising Content Costs

In the DVD rental business, the rental company had the first sale doctrine, in which the com-
pany was permitted to rent a single disc many times to recover the cost of the content. But
this doctrine did not apply to digital content, and the technological shift away from the DVD
rental business was in part responsible for the excessive increase in content cost for Netflix.31
In addition, Netflix’s dependence on outside content suppliers such as the six major
movie studios and the top television networks contributed significantly to rising costs for the
company. As an example, Liberty Media Corporation’s Starz LLC had been an early Netflix
supplier. In 2011, Starz demanded US$300 million to renew its deal with Netflix, testament to
the power of suppliers in relation to market demand from an increasing number of competi-
tors. On September 1, 2011, Netflix customers learned they would lose access to newer films
from the Walt Disney Company and the Sony Corporation after talks to obtain those movies

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from Starz broke down. The loss created the impression of a major setback, even though the
films were making up a smaller share of viewing than previously.
However, Netflix did sign new deals with the CW Network, DreamWorks Animation, and
Discovery Communications in 2011.

Global Expansion
Beginning in 2007, Netflix shifted its focus to its streaming business in response to their cus-
tomers’ move to streaming in preference to DVD rentals and the rising cost of mailing DVDs.
Conveniently, expanding its streaming business did not require expanding its physical infra-
structure. This strategy has proven to be a major differentiator as it expands internationally in
the Americas and Europe.
By the end of 2011, the company had started operations in Canada and 43 countries in
Latin America, and planned to start European operations in early 2012. At the end of the
third quarter of 2011, Netflix had 1.48 million international subscribers with predictions of
2 million by the end of the year.32 The UK was considered a huge potential market. Twenty
million UK households had broadband Internet, and 60% of those households subscribed to
a paid movie service. In Latin America, four times that number had Internet access,33 making
international expansion there especially attractive to subscriber-hungry Netflix.
However, international expansion was potentially risky, as Netflix faced rising content
costs from higher studio charges. In addition, international expansion required both broaden-
ing its content offerings and tailoring those offerings to meet the specific needs of each of its
international markets, which Netflix feared would further increase content costs. It was clear
that the correct content mix was crucial, yet a huge challenge for Netflix.
In addition, as Canada and the UK were already developed markets, Netflix faced local
competition from a proliferation of DVD rental/streaming services. In the UK, for instance,
Virgin and Sky already had strong brand recognition and balance sheets, and the Sky net-
work had already contracted exclusive first-pay window rights to movies from all six major
American studios, tough competition that could easily delay profitability from international
operations.
Lower per capita income and slower Internet speeds, especially in Latin America, were
further potential problems for Netflix’s international expansion. In Canada, low data usage
limits per subscriber were a concern for a data hungry service such as Netflix.

Financial Results
In 2011, Netflix surpassed US$3.2 billion in sales, an annual revenue growth of 50% over
2010 (US$2.1 billion, see Exhibits 1–3). Subscriber growth was the most important metric
for Netflix because its revenue growth was directly correlated to its subscriber growth. Netflix
grew from 12 million subscribers in 2009 to 20 million in 2010, and then to 27 million in
2012. International operations were set to expand to become a major source of sales growth
for the company in the coming years.
However, by 2012, Netflix faced challenges from its pricing changes in the United States
and its expansion into international markets, even stating that it expected revenue per sub-
scriber to drop from its 2011 level of US$11.5634 as subscribers choose the streaming only
option of US$7.99 over the more expensive streaming and DVD delivery option. For future
revenue growth, Netflix needed to increase its subscribers numbers both domestically and
internationally.

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 514 C ase 1 2   Netflix, Inc.

EXHIBIT 1
Netflix, Inc. Year ended December 31
Consolidated
Statements of   2011 2010 2009
Operations55 (in Revenues $3,204,577 $2,162,625 $1,670,269
thousands, except Cost of revenues:      
per-share data)
Subscription 1,789,596 1,154,109 909,461
Fulfillment expenses 250,305 203,246 169,810
Total cost of revenues 2,039,901 1,357,355 1,079,271
Gross profit 1,164,676 805,270 590,998
Operating expenses:      
Marketing 402,638 293,839 237,744
Technology and development 259,033 163,329 114,542
General and administrative 117,937 64,461 46,773
Legal settlement 9,000 — —
Total operating expenses 788,608 521,629 399,059
Operating income 376,068 283,641 191,939
Other income (expense):      
Interest expense (20,025) (19,629) (6,475)
Interest and other income 3,479 3,684 6,728
Income before income taxes 359,522 267,696 192,192
Provision for income taxes 133,396 106,843 76,332
Net income $226,126 $160,853 $115,860
Net income per share:      
Basic $4.28 $3.06 $2.05
Diluted $4.16 $2.96 $1.98
Weighted-average common      
shares outstanding:
Basic 52,847 52,529 56,560
Diluted 54,369 54,304 58,416

EXHIBIT 2
Netflix, Inc. As of December 31
Consolidated
Balance Sheets55   2011 2010
(in thousands, Assets    
except share and Current assets:    
per-share data)
Cash and cash equivalents $508,053 $194,499
Short-term investments 289,758 155,888
Current content library, net 919,709 181,006
Prepaid content 56,007 62,217
Other current assets 57,330 43,621
Total current assets 1,830,857 637,231
Non-current content library, net 1,046,934 180,973
Property and equipment, net 136,353 128,570
Other non-current assets 55,052 35,293
Total assets $3,069,196 $982,067

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Exhibit 2 
(Continued) As of December 31
  2011 2010
Liabilities and stockholders’ equity    
Current liabilities:    
Content accounts payable $924,706 $168,695
Other accounts payable 87,860 54,129
Accrued expenses 63,693 38,572
Deferred revenue 148,796 127,183
Total current liabilities 1,225,055 388,579
Long-term debt 200,000 200,000
Long-term debt due to related party 200,000 —
Non-current content liabilities 739,628 48,179
Other non-current liabilities 61,703 55,145
Total liabilities 2,426,386 691,903
Commitments and contingencies (Note 5)    
Stockholders’ equity:    
Preferred stock, $0.001 par value; 10,000,000 shares    
authorized at December 31, 2011 and 2010; no shares    
issued and outstanding at December 31, 2011 and 2010 — —
Common stock, $0.001 par value; 160,000,000 shares    
authorized at December 31, 2011 and 2010; 55,398,615    
and 52,781,949 issued and outstanding at December 31,
   
2011 and 2010, respectively
55 53
Additional paid-in capital 219,119 51,622
Accumulated other comprehensive income 706 750
Retained earnings 422,930 237,739
Total stockholders’ equity 642,810 290,164
Total liabilities and stockholders’ equity $3,069,196 $982,067

Exhibit 3 
Netflix, Inc. Consolidated Statements of Cash Flows55 (in thousands)

Year Ended December 31

  2011 2010 2009
Cash flows from operating activities:      
Net income $226,126 $160,853 $115,860
Adjustments to reconcile net income to net cash provided by operating activities:      
Additions to streaming content library (2,320,732) (406,210) (64,217)
Change in streaming content liabilities 1,460,400 167,836 (4,014)
Amortization of streaming content library 699,128 158,100 48,192
Amortization of DVD content library 96,744 142,496 171,298
Depreciation and amortization of property, equipment, and intangibles 43,747 38,099 38,044
Stock-based compensation expense 61,582 27,996 12,618

Source: http://files.shareholder.com/downloads/NFLX/2097321301x0x561754/3715da18-1753-4c34-8ba7-18dd28e50673/NFLX_10K.pdf
(continued )

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Exhibit 3 
(Continued)

Year Ended December 31

  2011 2010 2009
Excess tax benefits from stock-based compensation (45,784) (62,214) (12,683)
Other non-cash items (4,050) (9,128) (7,161)
Deferred taxes (18,597) (962) 6,328
Gain on sale of business — — (1,783)
Changes in operating assets and liabilities:      
Prepaid content 6,211 (35,476) (5,643)
Other current assets (4,775) (18,027) (5,358)
Other accounts payable 24,314 18,098 1,537
Accrued expenses 68,902 67,209 13,169
Deferred revenue 21,613 27,086 16,970
Other non-current assets and liabilities 2,883 645 1,906
Net cash provided by operating activities 317,712 276,401 325,063
Cash flows from investing activities:      
Acquisition of DVD content library (85,154) (123,901) (193,044)
Purchases of short-term investments (223,750) (107,362) (228,000)
Proceeds from sale of short-term investments 50,993 120,857 166,706
Proceeds from maturities of short-term investments 38,105 15,818 35,673
Purchases of property and equipment (49,682) (33,837) (45,932)
Proceeds from sale of business — — 7,483
Other assets 3,674 12,344 11,035
Net cash used in investing activities (265,814) (116,081) (246,079)
Cash flows from financing activities:      
Principal payments of lease financing obligations (2,083) (1,776) (1,158)
Proceeds from issuance of common stock upon exercise of options 19,614 49,776 35,274
Proceeds from public offering of common stock, net of issuance costs 199,947 — —
Excess tax benefits from stock-based compensation 45,784 62,214 12,683
Borrowings on line of credit, net of issuance costs — — 18,978
Payments on line of credit — — (20,000)
Proceeds from issuance of debt, net of issuance costs 198,060 — 193,917
Repurchases of common stock (199,666) (210,259) (324,335)
Net cash provided by (used in) financing activities 261,656 (100,045) (84,641)
Net increase (decrease) in cash and cash equivalents 313,554 60,275 (5,657)
Cash and cash equivalents, beginning of year 194,499 134,224 139,881
Cash and cash equivalents, end of year $508,053 $194,499 $134,224
Supplemental disclosure:      
Income taxes paid $79,069 $56,218 $58,770
Interest paid 19,395 20,101 3,878

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In terms of net income, Netflix had steadily improved its bottom line in conjunction with
strong top line growth. The company had a net income of US$226 million in 2011 for a growth
rate of 40% over the previous year’s US$160 million net income. Over the five years from
2006–2011, the company saw an average net income growth of 31% per year that, coupled
with high revenue growth, was instrumental to Netflix’s high stock valuation. However, re-
cently, its operating margin slid from 15% in 2010 to 2.9% in 2012, a drop directly attributable
to the higher cost of content acquisition.
Until the end of 2007, Netflix had no long-term debt on its books, but it began to acquire
long-term debt in 2008 as a result of its decision to invest in building a strong content library and
expand overseas. At the end of 2011, Netflix had US$508 million in cash and US$200 million
in long-term debt.

Netflix’s Success
Netflix went from being a company that exclusively mailed DVDs to the largest media de-
livery company in the world by making some smart strategic decisions. For instance, Netflix
jumped on the streaming bandwagon even though it was not really ready. At the time, the
online content available for streaming was extremely limited—less than 10% of the content
that was available from Netflix’s DVDs holdings.
At that time, Netflix’s mail-order DVD business was very popular, and customers did
not seem to mind waiting a day or two for their DVDs. Netflix then went ahead and offered
streaming content, a bold decision that anticipated an as yet unexpressed need for the immedi-
ate gratification of streaming, and made Netflix the first entrant into the market for streamed
video. It was clear to Netflix that the use of DVDs would gradually decline, and Netflix’s
aggressive adoption of streaming videos was a sharp marketing move, that gave it an edge in
the global economy.
After its initial launch of online streaming, Netflix kept up to date with new trends and
customer preferences, especially the quickly changing preferences of Generation Y, which
were influenced by branding, social media, and media saturation. Netflix utilized all the plat-
forms that Generation Y would find appealing, from computers and TVs, to Smartphones and
tablets.
Continually bearing in mind that the two most important things for Netflix’s custom-
ers were price per content, and quality of content, Netflix kept its priorities straight and
never stopped improving the quality of its content, or the platforms for delivering that
content.
Netflix also focused on increasing customer engagement. It allowed customers to rate
movies they viewed, thereby enhancing the customer experience and creating a community of
viewers. And, by tracking the movies a customer viewed, Netflix was able to track customer
preferences, and offer targeted recommendations for viewing. Netflix also exploited customer
loyalty to attract new customers, for instance, through its “refer-a-friend” offer of one free
month of service for both the new customer and the referrer to attract new users who wanted
to try the service risk-free.

The 2011 Price Increase/Rebranding Debacle

Netflix continued to grow robustly by offering a combined DVD mail and unlimited stream-
ing service at a flat rate of US$9.99 a month, a rate that was key to Netflix’s ability to offer
a great value for money service. But with increased competition and expensive new content

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deals, the company found it increasingly difficult to maintain its operating margin levels. In
the third quarter of 2011, Netflix implemented a 60% price increase, from US$10 to US$16 a
month for unlimited streaming and DVDs by mail, which immediately resulted in the loss of
800,000 subscribers, pointing to the company’s very limited latitude with regard to pricing.35
In response, Netflix took action that very shortly proved disastrous. In addition to rais-
ing its prices and shifting its business model to focus on online streaming. Netflix also
attempted to restructure its operations by spinning off its DVD delivery service and rebrand-
ing it Qwikster. Rebranding a well-known product or service such as Netflix usually only
works if a company was trying to simplify its brand, almost never the other way around,
which was, unfortunately what Netflix tried to do. Netflix attempted to introduce a new en-
tity, Qwikster, by splitting the old entity into two: with two separate websites, two separate
queues, two separate sets of recommendations, two separate customer bases, two separate
billing avenues, and two new sets of rules customer had to learn about. While Netflix had
banked on the competitive advantage of offering “affordability, instant access and usability,”
the introduction of a separate website undercut instant access and usability. Customers, crit-
ics, and Wall Street responded harshly.
Apart from losing over 800,000 subscribers after its price increase, and losing half of its
market capitalization, Netflix’s rebranding strategy did not seem justifiable to its customers.
Netflix botched the rebranding because it neglected due diligence prior to launching it and
its price increases. Market research would surely have indicated customer resistance to both.
Heavily focused on increasing profits, Netflix did not effectively strategize the rebranding/
repricing plan, nor did it anticipate resistance or prepare strategy implementation scenarios.
A new strategy should not only increase revenues and profits, it should consider relationship
and brand image gains and losses. In springing the rebranding on customers, Netflix under-
cut the quality of the experience it had previously offered, and the negative reaction was not
mitigated by the company’s public apology or its rescinding of its decision to split its services.
The botched rebranding led to a dilution of Netflix’s brand, and loss of customer trust. Re-
establishing its brand image became a priority for Netflix, though it was not very easy to do.
The company needed to offer something genuinely useful to its customers at just the right
cost, while increasing the quality of the content offered and enhancing customer experience.
Finally, in order for Netflix to expand internationally, it needed to invest in the techno-
logical infrastructure in the international markets that it lacked but which it desperately needs
due to heavy competitions and other legal concerns that appear there

Strategic Challenges Ahead for Netflix

Netflix’s top management needed to address many issues to maintain the company’s leading
position in the home video market. A strategic plan was needed to:
1. Repair the PR damage from the rebranding and price increases of 2011.
2. Focus on growing its subscriber base both at home and abroad.
3. Maintain a healthy cash position to meet the growing content cost obligations.
4. Invest in innovative user interface and streaming technologies to create a solid platform
for the shift from DVD delivery to streaming.

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