Saturday, 24 September 2011

How to Destroy Your Customer Base and Investor Confidence

Netflix used to have a charmed life.

This year, however, poorly thought out strategy and lurching decisions are stripping away many of its advantages and making it vulnerable to competitors.

Established in 1997, its founders saw opportunities in creating an Internet-based DVD-by-mail distribution system. It was designed to be a competitor to physical video stores, making it more attractive by offering a larger selection and using a unique IT driven distribution system that combined distribution centers across the country to serve customers within 24 hours at highly attractive prices.

The DVD-by-mail service became a hit, ultimately devastating the market of physical stores such as Blockbuster. By 2007 it had delivered more than 1 billion DVDs to customers. That same year it launched on-demand video streaming service so customers could also select a video and stream it to a PC (and later other platforms) for immediate viewing. The company allowed viewers a highly popular choice of physical DVDs or streamed video for the same price.

Effective marketing and the enviable distribution system led the company to became the largest video subscription service in the U.S., with 24 million customers

Despite--and because of the investments required for--its growth, the company was losing money on its $10 per month price for the joint service, so it suddenly increased it price to $16 dollars (a 60% increase) in July. That significant price change and the poor way it was introduced to customers—especially in the midst of poor economic times, angered customers and created price resistance that led a least a half million to drop the service.

Then, in September, the firm announced it would spin off its DVD-by-mail service and rebrand it Qwickster, leaving Netflix with the digital streaming business. Customers were furious to learn they would now have to pay separately for both services. By downplaying its DVD-by-mail business, the company hopes to reduce distirbution costs and its costs for content by moving content from a per rental basis to per subscriber basis that is more beneficial for the firm.

Netflix's decisions were not made with a customer focus, but a focus on stemming losses that worried some investors. That strategy is dubious, however, and share prices have fallen from nearly $300 per share in mid-summer to $140 per share.

The lurching changes have also made the company’s position seem vulnerable, leading to new competitors to enter the market. Dish Network, which bought Blockbuster out of bankruptcy, is now using it to introduce a competing DVD-by-mail and digital delivery services at competitive prices and Hula and Amazon are reportedly looking a ways to exploit consumer dissatisfaction.

The entire episode is a classic example of why companies should never take customers for granted and why company decisions need to be driven by creating--rather than subtracting--value for consumers.

Friday, 9 September 2011

How Much Cheating?

Big kerfuffle over at the Paulick Report on the just-released report from the Association of Racing Commissioners International (RCI) on drug test results from 2010. The report says that, of some 324,000-plus samples taken from horses last year, only 47 were found to contain Class 1 or 2 drugs -- those that have been determined to enhance performance and not to have any therapeutic use in horses, or in which the therapeutic effect is outweighed by the performance-enhancing potential.

Most of the commentators at Paulick's site think that the RCI report amounts to a whitewash. To a certain extent they have a point; the report specifically excludes Lasix, which has both therapeutic AND performance-enhancing effects. But the bulk of the criticism seems to be that, well, of course there aren't many positive tests, because the real cheaters are using brand-new designer drugs that can't even be tested for.It's a clever bit of logic; if you can't find the drug in the lab, that just proves that it's there.

I'm not a scientist. Don't even play one on TV. And I had enough trouble understanding all the scientific arguments at last June's "Summit" at Belmont, discussed here. But the extraordinarily low number of positive tests does seem to me to reinforce the impression that I get hanging out on the backstretch of NYRA tracks; most horsemen are serious about their craft and honest, following the rules as best they can. If Lasix is legal, why not use it, as it's clear that it helps a lot of horses run faster. By the way, kudos to trainer Kiaran McLaughlin, who, with the support of his Darley and Shadwell owners, is trying to go without Lasix for his new two-year-olds. Kiaran's giving up a powerful weapon, but he might gain some valuable knowledge if Lasix is eventually banned.

The state-by-state results in the RCI study are interesting. New York accounted for 15% of all the tests, but many fewer positives, with a positive-test score of only 0.011 percent. For the US as a whole, the rate was 0.49%. Only New Jersey had a lower positive rate than New York, with 0.08%.

At the other end of the spectrum, the positive rate in Minnesota was 3.26% and in Arizona it was 2.54%. Other states with more than  1% of tests returning positives were Colorado, Montana, Michigan, Nebraska, North Dakota (a stunning 7%, but a very small sample size), Ohio, Oklahoma and West Virginia.

Among the other major racing jurisdictions, California reported a positive rate of 0.25%, and Florida was at 0.84%. Kentucky appears to test far fewer horses than either New York or California, and reported that its rate for drug positives exceeded the national average at 0.75%. No surprise there for those who heed the rumors. Kentucky didn't even order a test of Life at Ten after last year's Breeders Cup debacle.

The RCI report doesn't name names and doesn't really address the problem of getting serious with those few trainers who do break the rules. At last report, Dick Dutrow and Patrick Biancone are still racing in New York. A simple, nationwide "three strikes and you're out" policy for Class 1 and 2 drug violations would be a really good idea.