Facebook / Netflix Chasm: Leverage Change To Create Value

Sep.26.11 | About: Netflix, Inc. (NFLX)

The recent meteoric advance of Facebook and the precipitous fall of Netflix (NASDAQ:NFLX) are a consequence of the same three tenets of success in a volatile business market: Use social connections as a means to a greater end, make change to create value, and respect consumer behavior.

Netflix founding CEO Reed Hastings, who brilliantly engineered the company's singular premiere value proposition, surprisingly and spectacularly has failed on all fronts. He demonstrated that there are no guarantees about catching lightning in a bottle twice, and nothing instinctive about knowing what consumers want and how to monetize it.

Ripping a page from the failed playbooks of Viacom/CBS (NASDAQ:VIA) (NYSE:CBS) and AOL/Time Warner (NYSE:AOL) (NYSE:TWX), Hastings recently announced the split of Netflix's declining, costly DVD by-mail service (renamed Qwikster) from its lucrative newer streaming movies service. The backlash from users and investors was swift. In a week in which the stock market lost 7% of its value, the damage to Netflix's market cap was slashed by half.

Even if Hastings didn't get the memo about the need to manage and maximize transitioning technologies as coexisting forces in any business, his video mea culpa was a disgrace for any CEO who is paid to know better. Now Netflix's broken trust with customers threatens its business model amid heightened competition. It may not be game over, but it could be game lost.

Meanwhile, Facebook founding CEO Mark Zuckerberg has announced the company's own jarring changes to its core business proposition at a mid-week developers' conference that he knows will unsettle its more than 800 million active users. Pulling the rug out from underneath Facebook members has become a regular exercise that Zuckerberg has elevated to an art form.

Ultimately, the trade-off is the relevant, specific information users get in exchange for information shared - which is social's golden currency. How Facebook leverages all of that - capturing more than 40% of all time spent across the top 10 Internet brands, according to Nielsen - is where billions stand to be made.

With 90% of time on all social networks being spent on Facebook, you might think that Zuckerberg can do no wrong. But this latest Facebook iteration reflects Zuckerberg's hard-learned lesson about initiating change only when it is all about the value created for consumers - not just for the company.

Believing that social is the engine for growth across all industry and businesses, Facebook is expanding and refining its social graph to create its own self-sustaining mini-Internet to solve and mine the big interactive issues of the day. For one, mobile payments and spending will be fostered among consumers in the familiar, supportive social environment by visually integrating people, places and entire experiences (reading books, watching movies, looking through photographs, shopping) into the fabric of Facebook.

Clearly, Netflix should have spent less time trying to figure out how to jettison a dying business and more time developing an effective social framework for its streaming entertainment, which it still is straining to initiate through - what else? - Facebook.

Taken together, Facebook and Netflix provide contrasting cases of how (or not) to grow a business in times of disruptive technology and challenging economics. Hastings is seeking to cut the drag on his balance sheet amid a leveling of Netflix's membership growth and the start of more contentious renewals with some content distributors, such as Starz.

Zuckerberg is all about putting apps to work in new ways to make Facebook's enterprising social graph the quintessential filter and a bridge to everywhere consumers want to transact the business of life: media, experiences, goods and services.

One of the new mechanisms is a Timeline feature, a graphic inventory of places, events and things that can be leveraged to generate revenue through the simple process: share, discover, apply, transact, repeat. What promises to be a viral dream for marketers could quickly become a nightmare if Zuckerberg fails to use individual consumer relevance as the fail-safe for participation.

Google (NASDAQ:GOOG) is beginning to understand why. Its chairman Eric Schmidt was publicly chastised this week during a Senate antitrust hearing for the search giant titling its search results in favor of its own online commerce offerings, which limits choice and stifles competition. What matters is the final result: If individual users believe a social network or site makes their life - spending and socializing - more relevant and effective.

That notion has become the defining factor between success and failure in business today, as evidenced through Facebook and Netflix the past week.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.