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Posted: October 05, 2011

Netflix’s CEO: Traitor or hero?

Gotta give him props for courage

Todd Ordal

A recent edition of the Wall Street Journal had three columns on Netflix CEO Reed Hastings. He's mostly vilified for his pricing decision and splitting his DVD business with his streaming business. I don't want to explore his pricing strategy, nor do I want to write yet another populist message asking how he could be so harsh toward his customers by dramatically raising his product's price.

This is far more than just a pricing decision; it was a choice about the viability of his company. Here's my premise: Reed Hastings showed tremendous courage to address a looming disaster - courage that many leaders couldn't have shown. I don't know what Netflix will look like in the future, and I don't know if his strategy will work. (If you do, don't be a pansy! Buy or short the stock!)

What I do know is that he looked into the future and said, "This dog won't hunt!" The latest annual report filed with the SEC states, "Our core strategy is to grow our streaming subscription business within the United States and globally." Right or wrong, he took action consistent with his strategy.

How courageous to take a hard left turn when you're still profitable and growing! The business landscape is littered with companies and industries that died for lack of courage. One of my favorite examples is the record industry. Steve Knopper, a Rolling Stone editor, wrote a great book about this titled "Appetite for Self-Destruction." It's fascinating and frightening if you're a CEO, and even better if you're a CEO and love music!

What if the leaders of Blockbuster, Polaroid, Kodak, Schwinn, and the failing record labels and newspapers had Reed Hastings' courage? They might have failed miserably, but not because they put their heads in the sand!

What are the prerequisites for a company to shed its skin and become a different animal?

1. A looming and discoverable disaster
2. A future-focused leader with a process for identifying probable game changers and crafting a new vision and strategy
3. A leader with tremendous self-confidence who understands risk
4. A leader who's willing to forgo today's profits and rewards for the possibility of longer-term prosperity
5. An extremely supportive board or ownership if a hired gun runs the company (Was Lee Apotheker of Hewlett-Packard a poor leader, or was he a courageous leader without the board's support? We may never know!)
6. The resources to execute the new vision and strategy

Some extremely talented CEOs who run very successful companies do NOT have these characteristics. As long as they don't run into a Napster or an iTunes, they may prosper for their entire term!

Another option, of course, is to run the declining business as a cash cow - stop reinvesting, pull out free-cash flow and invest it elsewhere. (This is how Warren Buffet built his empire - by drawing available cash from Berkshire Hathaway, a textiles company in a slow death spiral, and reinvesting in other companies with growth potential.) However, like the federal government, most operators can't get themselves to willingly wind down expenses.

Time will tell whether Reed Hastings is a turncoat or a hero, but I give him a lot of credit for having the guts to change.
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Todd Ordal is President of Applied Strategy LLC. Todd helps CEOs achieve better financial results, become more effective leaders and sleep easier at night. He speaks, writes, consults and advises on issues of strategy and leadership. Todd is a former CEO and has led teams as large as 7,000. Follow Todd on Twitter here. You can also find Todd at http://www.appliedstrategy.info,  303-527-0417 or todd@appliedstrategy.info

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Readers Respond

I must add that being a businessman is for profit, but ONLY in the sense that profit is the score board. I, like most entrepeneurs, do what we do because it's truely creative. It's an awesome feeling to see a business function profitably and provide a service. By John Wray on 2011 10 18
Hi John, As I noted in the column, my point was about bravery and making hard choices, not about his execution though the execution was poorly done. I agree that a business must profitably fulfill a market need. Sometimes customers can give you an answer to that equation, but not always. FedEx, Facebook and many other visionary products were not born from surveys. The ultimate survey is wether they'll buy it. Certainly customers must see enough value to pay your price. I suspect we're on the same page here. Our disagreement is with your assertion that "most CEOs don't look at the customer side of the equation." I believe that most are keenly aware that they must provide a good value proposition. They can't afford to ignore their customers, and they must have a viable business model. Cheers, Todd By Todd Ordal on 2011 10 18
I don't think he is either a traitor nor a hero...but I DO think that if I were on his board, I would push for his termination. His mistakes were not in raising prices, nor floating the doomed "Quickster," but in not having the foresight to do extensive research and focus groups with his customers to see the reaction to his decisions. A "phase in" period would have been great. Customer surveys would have helped. Too many "businesspeople" make what they THINK are good bottom-line decisions without having the courtesy to consult those who made the business in the first place -- their customers. Businesses must run for profit, of course. But I see far too much emphasis on profit and revenues and not nearly enough on customer service and pleasing those who buy from you. It is this short-sighted strategy that tends to cause businesses to go belly-up, thereby eliminating profit. But most CEOs don't look at the customer side of the equation. As it is, Netflix has lost thousands of previously satisfied customers...not that Netflix customer service has EVER been anything to write home about. By John Heckers, MA, CPC, BCPC on 2011 10 18
John--If there is ever anyone who is "lonely at the top", I'm sure that Hastings is! You're right. Lynn--I used my VCR for the first time in years this month. (A friend suggested that we catch up on Dexter and had the DVDs.) TC--Great observations. It would have been much easier to sit back while his market eroded and retire to the sale boat. Cheers Todd By Todd Ordal on 2011 10 05
Todd, thanks for this provocative article. I'm no stock pundit, not do I claim to be a Fortune 500 strategist. But I know the psychology of success of elite-performers and Hastings has exhibited one of characteristics that differentiates those who become great versus those who are good. He has the courage to fail in order to succeed. There is no CYA, or safe strategy here, he's laying it all on the line. I'm not happy paying more for my Netflix entertainment, but I have great respect for Hastings courage to make this change now, rather than when the company is losing money! By TC North on 2011 10 05
Streaming is definitely the future in my opinion. I don't even have a DVD player hooked up anymore. I stream to my TV and audio from my computers, ipad & pretty soon the iphone4S using my Apple TV device. I also use on demand streaming from the cable company. DVD's are going to diminish dramatically. This doesn't mean Netflix' stock will rise, but I do believe the trend to streaming is here and now. By Lynndell on 2011 10 05
Good article. Most people don't know what it's like to make such decisions By John Wray on 2011 10 05

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