I remember working through a case study on Netflix years ago, back when they made the pivot to digital streaming. The exercise stuck with me because it showed something I have seen over and over since. The right way to do things only becomes the right way after the first person or company succeeds doing it.
In January 2007, Netflix was spending about $40 million on streaming. Analysts were downgrading the stock. The share price dropped more than 12 percent. Wall Street was uneasy because Netflix was spending ahead of the curve on a business that looked uncertain. The company was still fundamentally a DVD business, but management was already investing strategically in online video and bundling DVDs with instant viewing. They cut guidance in mid 2007 and warned of lower revenue, subscriber growth, and earnings while they kept investing for the long term.
The really severe backlash came later, in 2011, when Netflix tried to separate DVD and streaming more aggressively with the Qwikster plan. That move sparked a revolt from customers and investors. The reaction was overwhelmingly negative. Investors did not object to the idea that streaming was the future. Netflix itself told shareholders in October 2011 that its opportunity was to lead the internet video transition. The problem was that investors thought management was bungling the transition by moving too abruptly, raising prices, and disrupting a still profitable DVD business before streaming economics were fully proven.
The market reaction was brutal. Netflix told shareholders that the prior few months had been difficult and that it had dramatically overestimated. The company reported a net loss of about 800,000 U.S. subscribers in the third quarter of 2011, after ending the quarter with about 23.8 million U.S. subscribers. That subscriber shock fed directly into investor panic. The stock plunged by more than 50 percent after the 2011 fiasco, with the broader decline reaching roughly 75 to 77 percent from its 2011 peak over the following months. Business school summaries frame it as one of the company’s biggest strategic blunders.
So the reception was not great idea, let’s go. It was closer to streaming may be right long term, but this rollout is destroying trust, subscribers, and shareholder value.
By 2013, however, investor sentiment improved sharply as Netflix proved that a streaming first model could scale, retain subscribers, and support original content.
“The right way to do things only becomes the right way after the first person or company succeeds doing it.”
I think about this when I am trying to decide whether to move forward on something that feels right but looks uncertain to everyone else. If you think you know the right path, then just take it. Do not worry about what they are saying. They will only praise you when you are successful. On your way there they will constantly tell you what you are doing wrong.
The next time someone tells you your idea will not work, remember that Netflix lost 800,000 subscribers and saw its stock drop by more than half before proving the doubters wrong. The path only becomes right after you walk it.
