The Netflix Decision That Could Cost the Company Case Questions please see file attached for all the information, if you have other questions ask me. Case

The Netflix Decision That Could Cost the Company Case Questions please see file attached for all the information, if you have other questions ask me. Case 14.1: The Netflix Decision That Could Cost the Company
800,000 Subscribers
Netflix’s stock price was up 130 percent from the previous year and almost 190 percent over two
years. One can imagine smiling faces and high fives being given at the June 2011 shareholders’
meeting. Netflix has been credited with redefining the movie rental industry and bringing the
previously dominant player, Blockbuster, to its knees and ultimately putting Blockbuster out of
business. During the three months that followed the June 2011 shareholders’ meeting, the good
times continued and Netflix’s stock price increased another 15 percent peaking at $305 a share.
Fast-forward to the June 2012 shareholders’ meeting, where the mood was more somber. From
its peak, the stock price plummeted to approximately $69 per share on June 19, 2012, a loss of
$236 per share or 77 percent of its value. Given the concern over the company’s recent stock price
performance, the shareholders passed a successful motion to put management on notice.
In an almost three-to-one vote, shareholders elected to change the structure of the board of
directors to allow all board members to be simultaneously replaced. Page 400 Additionally,
shareholders voted to make it easier to call emergency meetings. While top management was not
replaced, the message sent by the majority of shareholders could be construed as “get your act
together or else you’ll be replaced.” A key question is: What happened to tarnish the previously
stellar performance of this innovative movie rental company and cause a near mutiny by its
shareholders?
There was a time in the not too distant past when renting a movie necessitated driving to a
video store to pick out and pay for in person (and return a couple of days later) a DVD. This
method of renting was not only inconvenient but also expensive with a twice-a-week video habit
costing in the neighborhood of $50 per month. This bricks-and-mortar business model was also
expensive for companies like Blockbuster and Hollywood Video because they had to purchase (or
rent), stock, staff, insure, and maintain several buildings across many cities.
Netflix reinvented video rental by delivering DVDs by mail and allowing unlimited live online
streaming of select content for one monthly fee. For less than $10 a month Netflix subscribers
could access content 24/7. Netflix’s business exploded. Blockbuster, the previous industry leader,
was slow to respond and when they did it was too late. Netflix had redefined entertainment rental
and Blockbuster was on the road to bankruptcy, eventually closing its 4,000 retail outlets.
Management at Netflix came to view its two content delivery methods, mail exchange and
online streaming, as distinct product lines and in September 2011 announced they were forming a
new brand, “Qwikster,” to facilitate the separation. This new company would handle the DVD
mail exchange and the Netflix brand would be exclusively used for streaming online services. The
split would unbundle the services, billing them separately and increasing the total price for those
wanting both products by about 60 percent. The move would also require customers to manage
their streaming and mail services through different accounts and separate Internet portals.
Many Netflix customers expressed outrage over the new plan to split the services, catching the
company off guard. However, from the company’s perspective, it was a good decision.
Management saw the DVD mail exchange business as underutilized, expensive to support, and
close to obsolescence, like the storefront outlets it had largely replaced. The separation of services
would help by allowing online-streaming-only subscribers to pay less while capturing additional
revenue from the continuing DVD mail exchange business. There were also compelling cost issues
that Netflix management was attempting to address. Content owners, such as movie and TV
studios, were growing more aggressive in negotiating their royalties and were demanding to be
paid based upon the potential number of streaming viewers rather than actual views. All Netflix
subscribers, including those that received content exclusively via mailed DVDs were being
counted as potential online streaming customers. Giving customers the option to be specifically
DVD-by-mail-only customers would lower the royalties Netflix was required to pay.
The consumer firestorm in response to the announced change caused management to
reconsider their decision. Reed Hastings, the CEO of Netflix, announced that the company had
behaved arrogantly in their announcement and the company would not be separated. Quikster was
never launched but the separate pricing for DVD by mail and online streaming would continue.
In the third quarter of 2011, Netflix lost 800,000 members, which was the first time the number
of company subscribers ever declined. Amazingly, net revenues increased and earnings per share
increased that same quarter. Interviewed after the fact, the Netflix CEO stated he did not remember
if consumer focus groups were used to gauge the potential impact of their decisions. Did the actions
by Netflix strengthen the company or did they simply send 800,000 customers to competing
content providers such as Hulu and Redbox?
Questions
1. Faced with the increased costs of delivering DVDs by mail and streaming online content,
clearly Netflix had to take some action. Describe the decision-making process you would
have advised Netflix management to follow.
2. What values are reflected in the Netflix decisions presented in the case?
3. Think back to the chapter discussion about the concept of escalation of commitment. Was
Netflix’s continuation with its pricing action (which resulted in a large loss of customers)
reflective of escalation of commitment, or was it a rational plan? Explain.
Case 15.1: Rotating Leaders: Orpheus Orchestra
The second week of January at Baruch High School in Manhattan, teenagers are noisily making
their way to and from class. On the street below, a siren blares through Union Square. And in a
classroom on one of the floors of the high school, musicians are sight-reading a piece of music.
After several frustrating attempts, cellist Melissa Meell finally stops and shrugs her shoulders.
“We’re a long way from Carnegie Hall,” she quips.
That kind of wisecrack would be typical of a clever 12th-grader who’s struggling through her
first Mozart symphony, hoping to ace her audition for all-city orchestra and get a crack at playing
on the stage of that revered concert hall. But, in fact, Meell is 44, a professional musician, and a
member of Orpheus—a Grammy-nominated chamber orchestra that’s widely considered one of
the best of its kind on the planet. Although she and her fellow musicians are just 19 days away
from their next Carnegie Hall performance, they still sound as if they’re playing rubber bands.
With such an imposing deadline at hand, why is this prestigious group of musicians rehearsing
in such noisy surroundings? The school, it turns out, is its home. Orpheus has been the orchestra
in residence at Baruch High School for more than three years and at Zicklin School of Business,
which is affiliated with New York City’s university system, since September 1999. Orpheus is a
conductorless orchestra, and it was for that very reason that Baruch wanted the orchestra to take
up residence there—so that students could watch Orpheus rehearse and observe firsthand how it
uses collaboration and consensus-building to settle its creative differences. High school students
would get a living lesson in conflict resolution. And business students, who would soon be working
in a world where few people believe that a CEO has—or should have—all of the answers, would
learn that self-governance makes a worthwhile model and that leadership is most effective when
all levels of an organization have input.
Its self-governing and leadership abilities have made Orpheus more than just a group of gifted
musicians. Orpheus has actually become a metaphor for structural change—the kind of change
that has bedeviled so many big companies and exasperated so many big-company CEOs.
Orpheus’s founder, Julian Fifer, 49, first became aware of the group’s metamorphosis when a
chairman of a large Japanese publishing company approached him several years ago. “He told me
how much he had enjoyed our concert,” Fifer recalls. “But then he confided that he didn’t want
his employees to discover us.” Fifer was amused—and intrigued: If old-line business leaders
resisted their self-governing process, presumably there were corporate mavericks who would find
it compelling. That assumption proved to be correct. Several large companies, including Kraft
Foods and Novartis AG, have hired Orpheus to demonstrate its process to their executives.
What do these executives find so compelling about Orpheus’s sound and system? To them, the
group is a radical, ongoing experiment to find out whether grassroots democracy and commitment
to consensus can lead to transcendental performance—or whether it will all end in organizational
chaos and muddled results. So what is the key to the orchestra’s continued success? A set of
insights about motivation, decision making, performance, and work that are as relevant in
conference rooms as they are in concert halls.
Motivation: The Sweet Sound of Satisfaction
Those who aspire to a career as a classical musician and who are studying at a top conservatory
have a few obvious career paths: Clearly, the more talented you are, the more options you have.
Those who win or place well in big competitions can go on to sign recording contracts and to enjoy
solo careers. They can also choose to join chamber music groups, as do many of their other
colleagues. Virtually all—no matter how successful or well-known—teach. Some, however, are
forced to do so to support themselves financially. Most orchestra musicians who want to perform
full-time join symphony orchestras.
Those jobs offer relative stability and a decent income, but they are hard to come by. Even so,
back in the early 1970s, when Orpheus’s founding members were trickling out of music schools
and into the New York freelance scene, taking such a job was not high on their list of career goals.
“Many of us believed that joining a traditional orchestra would lead to a creative dead end,” says
Ronnie Bauch, 47, a violinist with Page 434 Orpheus since 1974, “because you’d be under the
thumb of its conductor for the next 30 or 40 years.”
“Ironically, your conservatory training leaves you ill-equipped to play in large orchestras,”
adds Frank Morelli, 40, a bassoonist who joined Orpheus in the late 1970s but sometimes also
plays in conductor-led groups. “Presumably, you’ve devoted so much time to studying music
because you have a need for self-expression. If you’ve studied at a top school for the past four or
so years, you’ve also got a certain amount of pride and ego invested in your career. And you’re
self-motivated because the competition is so steep. But all of those things can get in the way when
you’re sitting in an orchestra with a conductor telling you what to do.”
Some observers of the orchestra scene today believe that the moral righteousness of Orpheus’s
early members was prophetic. “The climate in most conductor-led orchestras is appalling,” says
Harvey Seifter, 46, Orpheus’s executive director, who left the theater world about two years ago
to take on the delicate task of administering to the needs of this self-governing enterprise.
“Orchestras take a lot of very smart people, many of whom learned to read music before they
learned to read words, and, if they’re violinists, sit them in the last row of the second-violin section,
where they must unquestioningly follow someone who’s waving a stick at them. Success is defined
as how good you are at getting your bow to leap off your violin at the exact same nanosecond as
all of the other violinists’ bows.”
That interpretation is in keeping with the results of a study conducted by Harvard psychology
professor Richard Hackman. In the early 1990s, Hackman looked at job satisfaction among
symphony musicians in 78 orchestras in four countries and found widespread discontent. Indeed,
in this now well-known study, symphony members experienced the same levels of job satisfaction
as the federal prison guards whom Hackman had studied earlier. Symphony musicians were,
however, happier than professional hockey players.
“Most of them adapt,” explains Hackman. “But they often do that by finding other ways to
develop musically. One person said that he had to be very careful not to let his symphony job get
in the way of making music.”
For Fifer, the inspiration for Orpheus came from his chamber music experiences back at
Juilliard. He found the sense of intimacy and connectedness that he felt with other musicians in
those groups exciting and inspiring, and he longed to find a way to re-create that experience on a
larger scale. “I loved chamber music’s clarity of sound and flexibility of temperament,” he says.
“I wanted to bring that camaraderie and spirit into a larger setting. And in order for everyone to be
able to communicate more effectively, it seemed necessary to do without a conductor.”
So Fifer invited a select group of musicians to that first rehearsal, carefully choosing among
those who he knew could take—as well as give—criticism. He named the group Orpheus, for the
Greek god who created music so powerful that stones rose up and followed him. “We had no
particular method for presenting interpretations and ideas on a piece, but our spirits were high, and
we had a great deal of enthusiasm,” he recalls. “It was as if we were calling out to anyone who
would listen. ‘Look Ma, no hands!’”
Decision Making: Everyone’s a Leader (Just Not All at Once)
But could they do it? When Fifer’s idea first took shape, he knew of no preexisting model for a
conductorless group of Orpheus’s size—anywhere. So his idea was an ambitious one: assembling
a number of renegade musicians and building a sustainable enterprise fueled only (at least at first)
by idealism and satisfaction. Still, the group pressed on, meeting at Chinese restaurants, rehearsing
in churches, and performing at public libraries and housing projects, because city-owned property
cost nothing to rent. Eventually, the group got a few annual grants from New York’s arts
commission, created a demo tape, and, in 1974, booked a small hall at Lincoln Center for its debut
performance. In 1979, Orpheus made its first concert tour of Europe, and five years later, it signed
a recording contract with the prestigious Deutsche Grammaphon label.
Even as performances gained recognition and attracted larger audiences, rehearsals remained
a work in progress. At first, all 27 members of the group participated in every decision that had to
be made for each piece—hundreds of tiny details involving dynamics, phrasing, and tempo. So
that Orpheus wouldn’t sound like dueling stereos, each decision had to be unanimous. And that
could take a while, especially when 27 strong-willed musicians were involved, and the buck
stopped with all of them. “Rehearsals were becoming free-for-alls,” says Martha Caplin, 48, a
violinist with the group since 1982. “We needed twice as many rehearsals just to try all of the
ideas.”
Any organization that operates on consensus risks the possibility of arriving at utterly wishywashy decisions. If the agreement process is itself chaotic, that Page 435 risk is even greater. To
combat that problem, Orpheus decided to experiment with a new rehearsal method. Instead of just
giving the floor to anyone who had an interpretation to offer, Orpheus formed smaller core groups,
whose members would change regularly, that would rehearse each piece before the entire group
began working on it.
“These core groups formulate one interpretation of a piece,” Bauch emphasizes. “It’s not
necessarily the interpretation. Sometimes it’s just a starting point.” A core group does the same
sort of preparation that a good conductor would do—researching the composer’s other works,
learning the history of the particular work that will be performed, and listening to recordings of
that piece of music. Then the core group presents its ideas to the entire ensemble during the first
read-through.
Another unusual aspect of Orpheus is the role that its concertmaster plays. In conductor-led
orchestras, the concertmaster is usually more of a team captain. But in Orpheus, that function
(which rotates regularly) is similar to that of a player-coach on a soccer team. Orpheus’s
concertmasters are responsible for actually running rehearsals, moderating debates among
members, suggesting resolutions to those debates, and making sure that such discussions don’t get
too bogged down. Although the core group exerts its influence mostly in the early stages of
rehearsing a piece, the concertmaster has more influence as performance dates near.
According to Fifer, having different people be concertmaster seemed the only logical way to
run a group fueled by 1960s idealism. The decision to rotate core-group members was, however,
more pragmatic: “That rotation method actually alleviates some of the pressure to try to get your
way all of the time,” admits Bauch. “Having to modulate our personalities and to take on different
roles gives us an opportunity to develop leadership skills as well as a chance to be supportive.” At
first, the entire group voted on who would be the concertmaster for each piece. Eventually,
Orpheus elected an executive committee that appoints a concertmaster according to an individual’s
particular musical expertise.
Not only do core groups and concertmasters change from concert to concert, but they also
change from piece to piece. Such frequent changes in leadership require some preperformance
planning. At the conclusion of every piece, Orpheus musicians bow and walk off stage. When they
return for the next selection on the program, they take different seats, according to their part in that
piece. This maneuvering is similar to that of the small chamber groups that Fifer envisioned when
he formed Orpheus.
And also like those small chamber-music groups, different members of Orpheus give one
another musical cues. Alert audience members will notice a musician use a nod of a head or a
gesture of a bow, in a way inviting a fellow musician to join the “conversation” by offering that
person a chance to pick up a musical thought. “At any time, you can be leading or following.
‘Supporting’ is the word that we like to use,” says Bauch. “When I’m about to get a cue. I often
find myself moving with the musician who’s playing.” That physical style of playing is usually
not experienced in a standard symphony orchestra. It’s as if members of Orpheus are all breathing
with the same set of lungs.
For performances, Orpheus sits in a semicircle, with the center space (which is normally
reserved for a conductor) empty. As a result, casual observers and some critics have erroneously
referred to the ensemble as being “leaderless.” In fact, “Orpheus exerts more leadership than any
other orchestra I’ve examined,” says Harvard’s Hackman.
Performance: Practice Random Acts of Leadership
Soloists often adjust how loud they play a piece and how long they hold a note to the acoustics of
a particular recital hall. Orpheus does the same. Those who have never worked with the group may
find its methods fascinating. “One of the neatest things about Orpheus is that one of its musicians
will go down and sit in the audience to hear how each piece sounds to a concertgoer’s ears,” says
Susan Botti, a singer and composer who wrote a piece that Orpheus premiered. “…
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