The news last week about Netflix losing a much greater number of subscribers than anticipated reminded me of how arrogance can undermine any company, including the high fliers (present and future) in the social gaming space. Let’s start with the Neflix case. With NetFlix, almost everyone outside the company foresaw the ferocity of the negative reaction to its new pricing strategy. Nor was this reaction really a secret once the new pricing was public, Facebook, Twitter and traditional news sites were rife with stories about how unhappy Netflix customers were. Yet Netflix felt subscriber losses would be minor and people would forget quickly about their anger. Although they may still claim that they anticipated the level of customer loss, it’s obviously not the case. The company has lost more than 40 percent of its value since making the pricing move, very few companies actively trying to destroy more than a quarter of its shareholder’s equity. Moreover, if they really felt it was unavoidable, they would of better prepared the market for the losses, as markets dislike surprises more than they dislike losses.
So how did Netflix make this major miscalculation? It happened because within Netflix management confused high customer satisfaction with loyalty. Users loved Netflix because they were getting a good product at a good value. They did not love Netflix because of the pretty red envelopes or the neat logo. Thus, when the value proposition changed, people had no reason not to look elsewhere and did. Again, something that was obvious to outsiders immediately when the new pricing was announced was completely missed by the people making the decision, destroying billions of dollars in value and potentially weakening NetFlix’s market share where it will never recover what it previously had.
What is particularly interesting is that last week there was another piece of business news that reflected the same phenomenon. Research in Motion (RIM), the maker of the Blackberry, also missed significantly its projections, particularly on its Playbook tablet. RIM, like Netflix, dominated its market for years and had a huge level of customer loyalty. Even when Apple came out with a phone consumers loved, RIM both publicly and privately felt it would never lose its core market, business users. They did not look closely at the merits of the Blackberry line against the iPhone, they seemingly just felt that their customers were to loyal to ever switch. When they launched their first tablet, they did not put out a product that had either a feature or price advantage to Apple, but again felt they would succeed because Blackberry users would buy anything they tried to sell. WRONG. Again, consumers showed they are loyal to a good product and a fair price, but when that equation is broken they will switch.
One last point is that this phenomenon did not start (or end) last week. The history of business is littered with once-great companies that failed to deliver continuously a stream of superior products and found themselves fall from greatness to mediocrity and often to bankruptcy. Just to name a few, Sony with the PS2 to PS3 (on the B2B side, they treated developers awfully when they were on top of the world and on the consumer side they put out a product that was not priced competitively), General Motors from its heyday to its transition to Government Motors, Real Networks when it saw a dominant position in the casual gaming market collapse, Sears when almost every family shopped there rather than a store that ended in mart, and on and on and on. All of these companies believed they had a lock on the consumer and could continually erode the value proposition (or fail to deliver the higher value competitors were).
The social gaming space is evolving in a way that it will be very easy for companies to make the same mistake. A lot of the high flying companies now feel they own their customers. Coupled with a strong desire to make their numbers look better, this belief often translates into eroding the consumer’s value proposition. I am saying this on the web side of social gaming (Facebook as well as European and Russian social networks) and even on mobile social gaming, which has only been around awhile. If you are at one of those companies, beware, as you can destroy your relationship much faster than it took to build it. If you are at one of the fast growing companies also beware, when you get to that dominant position, remember what got you there and treat your users accordingly. It’s not only good for them, it is the only way to thrive.