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Netflix’s Streaming Pivot Included a Surprisingly Harsh Decision

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The list of companies that failed to pivot when their industries underwent major changes is long.

Blackberry couldn’t pivot to touchscreen smartphones.

Kodak couldn’t pivot to digital photography (ironic, since Kodak invented the first digital camera in 1975).

Blockbuster couldn’t pivot to streaming.

The story of how Blockbuster had a chance to purchase Netflix in 2000 for $50 million is perhaps the biggest business whoops of all-time (though if you think the Netflix we know today would exist under Blockbuster’s stewardship, you’re missing the entire point).

While I’ve always been fascinated by Netflix’s ability to move away from its core DVD-by-mail business to become a streaming and content-producing powerhouse, I never knew until now just how brutally they did so.

Netflix

Photo credit: Shutterstock/sitthiphong

In a recent New York Times interview, Netflix CEO Ted Sarandos discusses the company’s evolution and the realization that their DVD business (which was doing very well) would not last forever.

“In periods of radical change in any industry, the legacy players generally have a challenge, which is they’re trying to protect their legacy businesses. We entered into a business in transition when we started mailing DVDs 25 years ago. We knew that physical media was not going to be the future. When I met Reed Hastings in 1999, he described the world we live in right now, which is almost all entertainment is going to come into the home on the internet. And he told me that at a time when literally no entertainment was coming into the home on the internet. And it really helped us navigate this transition from physical to digital, because we just didn’t spend any time trying to protect our DVD business. As it started to wane, we started to invest more and more in streaming. And we did that because we knew that that’s where the puck was going. At one point, our DVD business was driving all the profit of the business and a lot of the revenue, and we made a conscious decision to stop inviting the DVD employees to the company meeting. We were that rigid about where this thing was heading.”

“We made a conscious decision to stop inviting the DVD employees to the company meeting.”

Photo Credit: Shutterstock.com/yuriyt

As a manager, I’m not sure I could ever be that cutthroat. But I can’t entirely pick it apart. When your entire universe, knowledge base, and salary comes from one thing, it certainly can color and bias your view of a new thing that’s going to destroy the thing that’s your current lifeblood.

Sarandos acknowledges how harsh it sounds, but explains, “It got the whole company in the mindset that we shouldn’t keep investing in the old business. It’s going to prevent us from investing in the new business, and the new business is going to get us to the next place.”

There are obvious parallels to other industries. And though I’m not suggesting you start disinviting members to company meetings, the Netflix lesson makes it abundantly clear that brand and industry evolution on this scale requires dramatic internal philosophical and cultural change.

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Advertising is More Valuable Than Premium Subscribers?

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I read an article recently that surprised me. It explained that Netflix’s “Basic With Ads” subscribers are more valuable to Netflix than ad-free subscribers who pay $15.49 a month. I always thought the streaming business model depended on us all paying higher and higher subscription fees. Turns out, all these services want us to watch ads instead of paying higher fees.

Why? Because these companies learned that getting us to watch “premium ads” generates more revenue than monthly fees.

Photo credit: Koshiro K/Shutterstock

I personally love the ads. They give me a chance to get another drink, explain the show to my father-in-law, and use the bathroom. Plus, I’m learning about all kinds of new medicines that I didn’t even know I needed.

Now let’s consider the radio industry, which continues to rely on the ad model DSPs find so valuable, yet we seem to despise so much.

An unhappy program director may say “The commercials are killing the station!” But do listeners really feel that way?

We can argue another time about the legitimate issue regarding the quantity of commercials, but I have learned that commercials are expected on the radio—and maybe even quietly enjoyed by people like me.

So, what if we embraced the commercials? Worked hard at making them premium. And recognize that they are more valuable than any “subscription fee” we might someday be able to extract from an audience through our apps or other means.

When launching a new station, one of my mentors would include dummy commercials, mainly for concerts and new releases. He did this for two reasons: first, it gave the station credibility. Second, it created an expectation for commercials. Premium ones at that. Of course, he controlled the production and spent the time making them sound great.

I’m not the world’s biggest sports fan, but I have been enjoying the commercials I see during the baseball playoffs. Who doesn’t love a winged talking/singing Buffalo with his hooves on the bar? And it won’t be long until we have another round of Super Bowl ads to talk about.

There will always be advertising that radio stations are asked to run that is out of their control. But there are plenty that are within their control. Rather than focusing on how to not run them, maybe the focus should be on how to run and present them in a more appealing way.

Ads can be great if we make them great. And, as streaming services have learned, with the right ad structure there is real value to the bottom line.

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What’s Your Pivot?

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For every Netflix that adapts from DVDs by mail to streaming, there is a Blockbuster that fails to evolve. For every Google that sees a chance to dominate the online maps business, there is a MapQuest that had the brand name, yet failed to create a great mobile app in time. Every company, every brand must pivot at some point, and usually many times over its lifespan. Sometimes the pivot is short-term. Many businesses were forced to pivot during the pandemic, such as restaurants that shifted into a curbside/delivery-focused model. Many times, the pivot is absolutely necessary for survival. According to the Harvard Business Review, three conditions are required for a business pivot to work:

  1. A pivot must align the brand with long-term trends
  2. A pivot must be a lateral extension of the brand’s existing capabilities
  3. A pivot must offer a sustainable path to profitability, that preserves and enhances brand value in the minds of consumers

Here’s a look at two brands that made significant pivots from their initial core competencies, and one that is currently attempting to do so.

Garmin:

In October 2007, 75% of Garmin’s revenue was generated by sales of GPS devices for cars. The company did $2.5 billion in sales. The stock was at $120 per share. But four months earlier, Apple introduced the iPhone. GPS was now available for free on your mobile device. Within three years, Garmin lost 90% of its value.

By the early 2010s, wearables were in their infancy.  Fitbit and Jawbone were early leaders in the category, but no brand owned the high-end fitness enthusiast market. Garmin identified a new long-term trend (not a fad), was already in the electronics device business, and saw a path to winning market share. Incredibly, Garmin sustained only three periods of negative fiscal growth and is thriving.

Garmin successfully pivoted from in-car GPS devices to high-end smartwatches (Photo credit: Shutterstock)

Twitter:

Twitter was originally called Odeo, a service for discovering podcasts. When Apple added podcasts to iTunes in 2005, Odeo’s leadership decided they couldn’t compete and asked employees for ideas. An engineer named Jack Dorsey proposed a microblogging site where users could share short updates in real-time. The completed version of Twitter debuted in 2006, and Dorsey became the company’s first CEO. Odeo saw social media and messaging as a long-term trend, it already offered an internet-based service, and rebranding ensured the opportunity to build sustainable images. It met the three conditions required for a pivot to work.

Peloton:

Peloton has made its share of mistakes, from faulty treadmills to producing too many bikes during the pandemic, demand that was almost sure to taper off. Peloton stock, which peaked at $151 per share on December 1, 2020, sits at just under $8 as I write this.

And yet, Peloton has an incredible vault of content from its roster of fitness instructors, and a core of passionate fans. Though Peloton has always generated impressive content, it focused on the hardware. It marketed the bike, and opened stores where you can demo the bike. But as Pelton learned the hard way, bikes are expensive to make, expensive to deliver, and demand is fleeting. The profit margin on content is way more appealing.

Peloton has recently put more focus on its app, making the content available to those who don’t own Pelton equipment. Can Peloton successfully pivot perceptually from a bike company to a content company? It likely better aligns with long-term trends and is within its existing capabilities. That path to profitability part…we’ll have to see.

Peloton is attempting to shift from a device-focused strategy to a content-focused strategy (Photo credit: Shutterstock)

Consider your brand’s position in the mind of the consumer. Is it thriving? Has it evolved at the appropriate pace? Or does it need to pivot for future success? And if the answer is “pivot”, does it meet the criteria?

Consider these challenges thoughtfully and strategically, ideally utilizing perceptual research to clearly understand strengths and weaknesses to craft a profitable strategy moving forward.

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How Can Harley-Davidson (and Radio Talent) Remain Relevant?

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Tuesdays With Coleman

Two years ago, our Vice President of Research Operations David Baird wrote a blog post called, “Harley-Davidson Has More Problems Than Tariffs.”

Published in July 2018, it would become one of the five most-read Tuesdays With Coleman blog posts of that year. But the remarkable tale of that post was how it gained popularity with time. When we calculated the stats at the end of last year, “Harley-Davidson Has More Problems Than Tariffs” was the most-read post of 2019.

The Harley-Davidson blog post is about a brand that has struggled to evolve and maintain relevance. When a company makes attempts to evolve, it often violates the brand (e.g., introducing an electric motorcycle under the Harley-Davidson name when your brand is known for big, loud fuel-injected bikes). Last week, Personality Coach Steve Reynolds shared “How Harley-Davidson Killed Itself,” a video posted less than a month ago by a Canadian motorcycle blog that already has close to two million views. It offers a number of reasons for the company’s struggles, including some misguided attempts at evolving due to brand violations.

Steve works with morning radio talent, most of them established shows with deeply ingrained audience perceptions (like Harley-Davidson). As Harley-Davidson attempts to keep younger consumers engaged and interested, David’s blog post and video inspired Steve to share how he works with shows to remain relevant, including to people younger than themselves.

Here are Steve’s thoughts:

Will Harley-Davidson be successful in converting a younger audience to buy cheaper, faster, environmentally-friendly bikes? Most importantly, can a heritage brand known for something different effectively evolve?

It worked for Netflix–they seamlessly transitioned from DVD-by-mail to streaming dominance.

It didn’t work for Kodak–though the once dominant leader invented digital photography, it could not shift past its image as a traditional film company.

All radio talent will inevitably “age out.”

Any talent’s center of relevance stays the same. I will always be a child of the 70s.

That’s informed by my year of birth and formative years. To stay relevant, I must be inquisitive enough in life to gather a take on whatever is going on now because the audience wants to be connected to them, too. That I don’t personally care for The Bachelor doesn’t disallow me to have a working knowledge and take on it. I can only get that by experiencing it. Ditto every other relevant topic. The work of every talent is to be curious enough to fall down the rabbit hole of news articles, TV stories, YouTube videos, etc. on every topic to twist and turn their perspective.

Personality Coach Steve Reynolds

In the case of one major market Contemporary Hit Radio (CHR) show I work with, I used to always remind the principal talent that I’d get concerned if I heard them talking about college visits with their kids on the air. Why? Because the typical disconnect would happen with the core audience. Younger demos would say, “I cannot relate to these people because they’re my parents.”

The show hosts just celebrated their 20th anniversary together and continue to add relevant brand depth to the station because they’ve added fresh perspectives to the topics of the day from people in the demo – by using callers, interns, and new cast members – which has allowed them to just be themselves. They’ve actually heightened the show’s age relevance because of these strategic decisions.

Many shows I work with admitted to their audience when discussing the recent protests that they cannot understand the African American experience because they were White – that vulnerability defined them. Then, one invited on their show a Black pastor just so they could learn and listen. I found it to be immensely powerful and relevant to the moment.  It never got political, but was always human, real, and moving. It was deeply relevant on that day.

Relevance is this elusive term that means: we’re about what’s happening now. It’s why you see so many brands aligning themselves with messaging that parallels whatever is happening in the current news or pop culture cycle.

The goal for every talent should be to find interesting angles that inform them, from which they develop a perspective based on more than a tertiary knowledge about something because they saw it on their Facebook page.

If you want a brand and talent at their peak of relevance, especially for talent who’ve been around a while, don’t let them off the hook with poor excuses like “our audience isn’t into that” or “I don’t personally care.”  For connection, we all must dig deep to learn and read about the “now topics”, both silly and serious, if we’re ever going to bond with listeners to have a substantial relationship with them so they come back every day because they cannot get that connection and humanity anywhere else.

But what about the brand? Perhaps why, despite their recent innovation, Harley-Davidson is struggling is because they waited too long to pivot. If you release a bike that looks like a Ducati, rides like a Ducati and is even technically better than a Ducati, it doesn’t matter–Ducati was first and owns the image. Harley’s path to victory is immensely more challenging because they weren’t first.

Kodak may have been able to pivot to digital photography (Kodak invented the digital camera in 1975!) but was afraid to cannibalize its film business and waited too long, allowing Japanese competitors to win the image.

Netflix, on the other hand, pivoted early, becoming the streaming leader before any other brand could.

The key for the evolution of talent and the path to remaining relevant is always to recognize what’s relevant in every moment, bring in other players with perspectives that mirror the audience, and remain vulnerable and honest.

 

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Lack of Focus = Lack of Greatness

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Tuesdays With Coleman

Netflix just dropped the new season of Jerry Seinfeld’s Comedians in Cars Getting Coffee on July 19th. Each episode of the show features Seinfeld selecting a vintage car, then driving a fellow comic in that car to get coffee for a very casual interview/conversation. Episode One of the new season features Eddie Murphy, and that caught my attention.

Much of the episode centers on the two comedians talking about the old days, when they honed their stand-up craft in the New York area around the same time. There’s mutual admiration, Eddie slings a fair share of jokes, reveals he is planning a return to stand-up and shares some very insightful behind-the-curtain stories about Bill Cosby and Richard Pryor.

At one point of the episode in the coffee shop, Jerry and Eddie talk about the differences between the entertainment landscape back in the day and the present day. Eddie says, “You’ve got to put time in to creating something that’s worthwhile. Now you’ve got so many options, it seems hard to focus on something. So many options.”

To which Jerry replied, with emphasis:

“A lack of focus is why we have a lack of greatness.”

This astute observation got me thinking about focus in today’s environment and where the lack of focus is coming from. In other words, is it lack of focus on the part of the creator or the consumer?

It’s both.

From a consumer angle, the lack of focus is obvious. We are bombarded with more choice than ever before. More TV shows. More apps. More diets. More games. More news. More streaming. More podcasts. More social networks. More phones. More smart devices.

More, more, more!!

And you’re still expecting listeners to pay close attention to your radio station?

This is the foundation of Outside Thinking, a Coleman Insights philosophy that’s not new, but increases in societal relevance by the day. It instructs that listenership behavior is driven by numerous factors, many of them out of your control. When we adopt the mindset of our listeners, rather than the mindset of a programmer in a board room, we can more effectively reach and communicate with them.

But what about the creator angle? We know our consumers are losing focus. Are we?

Eddie gives an example of a comic he knows that has a specific niche. He’s known for a certain kind of comedy. Eddie explains, “Every Wednesday, this comic kills it. Then a different crowd comes in on Thursday and you can’t even get a laugh.” He follows this up with a remedy: “Just work the niche. You don’t think, ‘I wanna be able to kill on Thursday.’ You say I’m gonna kill every Wednesday.”

The point is, you can’t be everything to everyone. And you need to stop trying now.

We could recommend many books on this topic, but a perennial favorite at The House of Coleman is “Focus” by marketing genius Al Ries. A chapter that really illustrates Eddie’s point is Chapter 9: “Narrowing Your Scope.”

According to Ries, “More money has been wasted reaching out to a company’s ‘noncustomers’ than any other single endeavor.”

Radio brands are well-versed in the art of focusing on loyal customers. We’re taught to grow our ratings by growing the percentage of P1s (first preference listeners), as they provide the bulk of the listening.

Maybe the question to ask of our brands in the context of focus is, “Why does a P1 listener choose our radio station first?” Understandably, this answer varies. The reason a listener chooses a “Jack” station for an unpredictable variety of music is different than why, for example, a listener may choose a radio station with dominant personality images.

P1s choose your radio station because they love it for its niche. As Ries says, “All business is a niche business. The question is, what kind of a niche do you want to own?”

This mentality requires a shift in what being “best” means.

Should you want your radio station to be the best sounding? Of course. But the winning strategy is to have the best position. Build clearly defined, differentiated images, track them in perceptual research and dominate them.

Says Ries, “The power in business doesn’t derive from your products. It derives from your position in the mind. Focus is the art of carefully selecting your category and then working diligently to get yourself categorized. It’s not a trap to avoid; it’s a goal to achieve”.

The less focused consumers are, the more focused creators must be.

Like Ries says, “The future of your company depends on it.”

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Why Toys “R” Us Is Closing

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Tuesdays With Coleman

“Digital photography killed Kodak’s business.”

“Netflix put Blockbuster out of business.”

“Amazon put Toys “R” Us out of business.”

When an iconic brand goes under, the blame game always commences.

The truth is, Amazon didn’t put Toys “R” Us out of business. Neither did Target or Wal-Mart.

Toys “R” Us put Toys “R” Us out of business.

My colleague Warren Kurtzman wrote last week about how essential it is for every brand to have a clearly defined base position. But is that enough?

What’s a better base position than “the photography company”? Or “the movie store”? Or “the toy store”?

Kodak, Blockbuster and Toys “R” Us didn’t just have strong positions in their categories, they owned the dominant positions. The problem is, each of these brands lacked positive brand depth beyond their base positions.

An engineer at Kodak actually invented digital photography. In 1975. Navigating the consumer through the digital space using the brand equity of Kodak moments would have been a perfect and natural complement to its base position. Unfortunately, Kodak couldn’t see beyond its history as a film company, and competitors swooped in.

Blockbuster had an incredible, dominating base position. Unfortunately, it had negative brand depth in the form of late fees, which left it vulnerable. By the time Blockbuster removed late fees, it was too late.

If Blockbuster had entered the DVD-by-mail category or streaming category first, the company would quite likely still be around. Blockbuster had the chance to buy Netflix in the early 2000s for $50 million.  Today Netflix is valued over $100 billion, worth more than every media company that’s not named Disney.

Would Netflix have had that growth under the leadership of Blockbuster? Probably not, and that’s the point.

Netflix started as a DVD-by-mail company, but its base position centered around convenient entertainment delivery. All the moves and innovations Netflix has made, including doubling down on streaming and adding original programming, has been complementary to its base position. Netflix added brand depth.

Amazon started out as an online bookstore that became an online marketplace. Its moves and innovations, including ease of app use, marketing automation, customer service and free two-day delivery, have all supported its base position as an online delivery service.

Toys “R” Us had an enviable base position and an emotional connection to legions of children who wanted to be Toys “R” Us kids.

Where did the emotional connection go?

Although the road would have been challenging, Toys “R” Us could have added brand depth to its base position. It may have been through incredible marketing automation techniques (like Amazon and Starbucks) or hiring an ace social media manager (like Wendy’s). It could have been a research program that let kids test toys. It may have been partnerships with kids’ museums around the country.

Not to say any of those ideas would have definitely worked, but Toys “R” Us needed to try long before Amazon posed a significant threat.

Integrating Babies “R” Us into Toys “R” Us stores was definitely not the answer–it detracted focus from its own brand.

Last year, Toys “R” Us CEO David Brandon said the chain hoped to add playrooms where kids could try out toys and spaces for birthday parties.

Unfortunately, they never got the chance to give them a shot.

When we work with radio stations, we illustrate the base position on our Image Pyramid, but also explain the perils of a misguided Image Pyramid–which is what Kodak, Blockbuster, and Toys “R” Us all ran into.

Coleman Insights Image Pyramid

Clearly define your base position. Once you do, never stop adding brand depth.

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5 “Stranger Things” You Didn’t Know About Radio

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In honor of the release of Stranger Things 2  on Netflix today, here are 5 “stranger things” you didn’t know about radio:

  1. Radio saved the Eiffel Tower from destruction. The Parisian government planned to disassemble the tower for scrap metal. To prove it could be used as a strategic utility, designer Alexandre-Gustave Eiffel built an antenna stop the tower and funded experiments with wireless telegraphy in 1898. Today, more than 100 antennae on the tower broadcast radio and TV signals around the world. *History.com (3/31/14) 
  2. More Americans 6+ listen to radio (93%) each week than watch TV (89%), use a smartphone (83%), PC (50%) or tablet (37%). *2017 Nielsen Audio Today (6/22/17)
  3. Nikola Tesla, not Marconi, invented the radio. As early as 1892, Nikola Tesla created a basic design for radio. However, Marconi claimed all the first patents. The U.S. Supreme Court declared Marconi’s patents invalid and awarded them to Tesla in 1943, six months after Tesla’s death. Marconi generally still gets the credit. *Radiobroadcaster.org (2/24/14)
  4. Marconi was the great-grandson of John Jameson, founder of Jameson Irish Whiskey. *Clifdenheritage.org (12/1/10)
  5. Officially, from 1922-1971 you could not listen to radio in the UK without having a license. The government wanted citizens to pay ten schillings to get a license. *Radiolicence.org.uk