In Defense of Reed Hastings

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How Entrepreneurs Can Create Their Own Luck

Writing in 2002, Peter Drucker, the great management consultant, foresaw the future. “In the next 30 years,” he wrote, “power will shift to the customer – for the simple reason that the customer now has full access to information worldwide.” And the stage for Drucker’s great power shift – from the corporation to the consumer – is, of course, the radically transparent Internet, where nobody, it seems, can hide anything from anyone.

But is this power shift to the customer good for today’s digital economy?

One supporter of today’s radically transparent marketplace is Dov Seidman, the CEO of the consultancy firm LRN. As Seidman told me when he appeared on my TechcrunchTV show last weekend, this transparency will force companies to behave more ethically thereby creating both a fairer and more efficient economy.

But what Seidman and many of the other apologists for radical transparency miss is the destructive economic cost of all this openness. Today’s customer-centric Internet may be radically transparent, but it isn’t either radically fair or radically efficient. The problem is that power has shifted so dramatically from the producer to the consumer that it is becoming harder and harder to build viable, long-term companies in today’s fast moving and increasingly unforgiving digital economy.

Take, for example, Reed Hasting’s Netflix, which, in 90 nightmarish days, has been transformed from one of Silicon Valley’s most impressive paragons of innovation into a company on the verge of a nervous breakdown. Just last March, MG Siegler was rightly gushing  that Neflix was about to “shift” the entire cable television industry with its strategy of streaming originally produced content. But six months later, having increased its price by 60% for some customers earlier this summer, followed by a poorly communicated attempt to split the company into an analog and digital operation, Netflix has lost 800,000 customers and $12 billion in market value in 90 days – including a stunning $2.3 billion in one black day earlier last week.

Some people are thrilled by this hyper-democratic run on Netflix, arguing that it reflects the general will of a consumer that will no longer put up with any kind of corporate ineptitude or doublespeak. One so-called “customer service guru”, John Tschohl, even came on my TechcrunchTV show to crow that the arrogant Reed Hastings has got everything he deserved in this all-too-public humiliation.

I’m not going to defend the undefendable and make excuses for Netflix’s poorly executed strategic shifts this summer. But the problem with consumer and market reaction to corporate screw-ups in our age of radical transparency is that they lack any kind of scale. Up until this summer, Netflix ranked highly on customer service and was the poster child of innovation, offering an alternative business model to both iTunes and the cable providers. But today, with the company’s market valuation tanking and with its continued hemorrhaging of customers, Netflix’s focus is on its own survival rather than innovating an increasingly archaic industry.

In the old days, before Drucker’s great shift in power from the corporation to the consumer, a young promising company like Netflix would have had shelter from the intolerant storm of public opinion. And while I’m not arguing that we should (or could) go back to a pre-digital economy in which corporations are infinitely more powerful than consumers, we do need to discover a better balance between the almost instant destruction of today’s digital marketplace and a consumer culture which is more forgiving of corporate screw-ups.

So here’s the solution. My message to all those dissatisfied Netflix customers who care about the future of the culture business:  stop whining, show some generosity of spirit and foresight, and forgive Reed Hastings for his mistake. Uncancel your Netflix subscription and pay that extra couple of bucks a month for a service that is still unrivalled in its efficiency and still offers the most effective vehicle for building a 21st century customer-friendly subscription model. That way, Netflix can continue to innovate – which, in the long run, will be of incomparable value to consumers everywhere who want to enjoy high quality video entertainment on their digital devices.