How Netflix Recovered From the Qwikster Debacle and Saved its Brand

The streaming service has rebuilt its public image since its 2011 Qwikster debacle, a new poll shows.

Mar 27, 2014 at 10:58AM

People are not only subscribing to Netflix (NASDAQ:NFLX), but also have a rapidly increasing level of familiarity with the brand. Many are associating it with quality, and if they aren't customers already are more willing to consider purchasing the service.

The streaming video company was one of the big movers in the 2014 Harris Poll EquiTrend. The survey assessed more than 1,500 brands across 170 categories -- from automotive to department stores -- on the Harris Poll EquiTrend Brand Equity Index, which is comprised of three key factors: familiarity, quality, and purchase consideration.

"An examination of the 100 highest rated brands for 2014 shows brands that enable consumers to personalize their entertainment content and scheduling are growing their equity at a faster rate than brands in other categories," Harris said in a press release. "Netflix increased at the fastest rate among the Top 100 measured brands over the last two years (2012 to 2014) and Pandora Internet Radio (NYSE:P) also showed impressive equity growth over the past two years, with the fourth-highest rate of equity growth among the Top 100 brands within that period."

What does this mean for Netflix?
For companies like Netflix, building consumer trust is everything. It's a big leap from knowing about a service and being interested in subscribing to actually giving the company your credit card information. There are countless companies on the Internet that want your credit card number, and shockingly not all of them deserve your trust. Some might just have lax data policies that put your info at risk, while others might use your Visa account number to book their managers' tropical vacations.

Companies with brand equity have a level of standing with customers that can be the difference between window shopping and an actual transaction, especially for online entities. That level of trust has certainly helped Amazon (NASDAQ:AMZN), which had the highest brand equity score in the study (as it did in 2013) and was named e-Retailer Brand of the Year (as it was last year.)

Netflix is not only rapidly rising in the survey, but it's doing so in a manner that is not typical for how companies generally build public trust.

"Brand equity is not a measure that is typically subject to strong year-over-year vacillation; the growth curve is generally slow and steady," said Nielsen Consumer Insights (formerly Harris Interactive) Senior Vice President Joan Sinopoli. "Netflix is a market disruptor: it addressed a consumer need for convenience and variety when it took on brick-and-mortar video stores. Since then, the brand stumbled with its fee restructuring, took corrective action to restore consumer trust, and is taking advantage of the trend toward individualized entertainment."

Building brand equity is good for business
It's somewhat stunning that Netflix has built up this type of brand equity because only three years ago, the company was dealing with a major disaster. CEO Reed Hastings had decided to split the company's digital streaming service from its DVD delivery offering -- essentially a massive price increase for customers that took advantage of both. Customers were outraged, and Hastings did not solve the problem quickly. He first attempted to spin off the DVD business under the Qwikster brand name before finally apologizing and reversing the original move.

In the third quarter of 2011, the company lost 800,000 subscribers and Hastings apologized in a letter to shareholders .

"The last few months...have been difficult for shareholders, employees, and most unfortunately, many members of Netflix," Hastings wrote in the letter . "We've hurt our hard-earned reputation, and stalled our domestic growth."

At the time, the company also forecast that its numbers were going to get even worse.

Netflix had 23.8 million total U.S. subscribers as of Sept. 30, 2011, a drop from 24.6 million three months earlier. Around 21.5 million customers had streaming subscriptions, and just under 14 million had DVD subscriptions; most customers mixed the two. By the end of the ongoing quarter, which ended on Dec. 31, 2011, Netflix expected those numbers to drop further. It forecast that it will have 20 million to 21.5 million streaming customers and up to 11.3 million DVD subscribers in the U.S., CNN Money reported.

Netflix has righted the ship
The Harris Poll proves that Netflix has not only completed a turnaround, but it has done so rapidly. More importantly, it shows that Netflix has built the type of bond with its customers that few companies have.

"Something else these brands have in common is their ability to connect on a very deep level with the consumers they seek to attract," Sinopoli said. "They are all brands that consumers are passionate about."

Netflix ended 2013 with over 44 million members with higher domestic net additions than in 2012, according to a letter to shareholders discussing fourth quarter 2013 results. The letter also said that Netflix expects to end the first quarter of 2014 with over 48 million members.

As a company Netflix still faces significant challenges. It's expensive to license content, even more expensive (and risky) to produce original content, and the company will likely have to continue to make deals to pay for the Internet bandwidth its service requires. Still, having powerful brand equity gives you strong leverage. 

A cable company might be able to make a favorable deal to not limit bandwidth for a lesser streaming service because there would be limited public outcry if it carried through on its threats. The Harris Poll shows that the Netflix name means something to the public, and in a dispute with a lesser-liked brand (a category that includes all the cable companies) it's Netflix that would likely have the good will of the public on its side.

Your cable company is scared, but you can get rich
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 

 

Daniel Kline has no position in any stocks mentioned. He is a Netflix subscriber. The Motley Fool recommends Amazon.com, Netflix, and Pandora Media. The Motley Fool owns shares of Amazon.com, Netflix, and Pandora Media. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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