Netflix is being taught a hard lesson right now. And I sincerely hope that they learn from it. Arrogance sometimes comes with a price.

It seems like the bigger Netflix becomes, the less they listen to their customers. I can understand – more customers means a lot more to listen to. But, as CEO Reed Hastings revealed during an earnings announcement on Monday, they have a few less customers to worry about pleasing. 800,000 less customers. And apparently, the stock price also dropped during after-hours trading by 30%.

Netflix had good reason to be arrogant. I believe that without Netflix, most people would still be watching movies rented from Blockbuster or a lesser known video rental place. The irony is that Netflix succeeded in obliterating Blockbuster because of Blockbuster’s arrogance.

Sometimes success leads to poor decision making and poor focus at the executive level of a company. It’s as if executives delude themselves into thinking that the company itself manufactures money – the customer has no quarter in the board room. Blockbuster abused their customers for years, as the entire movie industry (especially the MPAA) has done for decades.

Blockbuster showed great arrogance in its disregard for the customer, and so it was no surprise that it also chose to ignore Netflix as the fledging company rose through the ranks. Customers hated late fees, and it was their chief complaint of Blockbuster. People also hated trying to remember to return movies – the reason for the late fees. But I think people also grew to despise the entire in-store experience. Poor customer service, extreme difficulty locating something worth watching, no wonder it failed. For most of our relationship, my wife and I can probably count on one hand, how many times we’ve rented movies – we’d rather not watch movies if it means so much hassle.

Netflix Was Supposed To Be The Hero

Netflix was great. For the cost of renting a couple movies, you could have as many movies you could watch delivered to your house for a month. Netflix created an amazing distribution network that meant that as soon as you popped one DVD in the mail to return, the next one in your queue was already on its way. The selection was amazing. In the first several months we had the service, a whole new world opened up for us. Movies that Blockbuster never would have carried due to low demand were in my queue.

Then came streaming. Wow! This was the future – any movie delivered instantly to almost any device. My four year old daughter watches shows on my wife’s iPod Touch, and 90% of what our house watches comes streaming through our Playstation 3.

But it wasn’t perfect. Chief among the problems: only a small fraction of the movies available on DVD through Netflix were available to stream. Hastings had stated a couple years ago that they were working on that. I knew that Netflix’s intention was to become streaming only. But now, there doesn’t seem to be much progress in that regard. In fact, movies and shows that I added to our “instant queue” have been removed and are no longer available. How does that benefit me?

And then there’s the user interface. What crap! But it isn’t like Netflix has never had a good interface… In fact, my wife actually participated in a focus group where attendees were asked to provide feedback on several proposed user interface designs for the Playstation 3. Overwhelmingly, they all chose the same one. A month or so later, that user interface was rolled out. I can’t tell you how awesome it was knowing that my wife actually helped select the new interface – and boy was it an improvement. Until a couple months later when Netflix ditched it for an interface that was even worse than the original. And it has only become less user friendly.

Of course the latest and most egregious offense by Netflix was the Qwikster debacle. Netflix decided that it would permanently separate DVD delivery from streaming by separating into two companies. Not only would users need to maintain separate accounts, but they would end up paying more for the service. A price increase despite rapidly increasing numbers of customers? (Note to Netflix executives: if you are going to smoke crack, at least get the good stuff…)

Although the company did reverse its decision, the damage was already done. As I mentioned earlier, the company lost 800,000 customers as a result.

What’s the Point?

Apple is arrogant. Steve Jobs’ arrogance is legendary. The difference: Apple isn’t just making products, they create experiences for their customers. Sometimes the company blows it. But most of the time, their intense focus on the customer experience results in game changing financial results. Remember, by market capitalization, Apple is the number one company in the world.

To succeed in business, you have to remember where your income comes from – your customers. You can devise all kinds of schemes to increase profit and make life easier for yourself, but if you aren’t placing the customer/client experience at the center of every decision, your arrogance may come back to haunt you.

Personally, I think Mr. Hastings is ready for a change. At heart, he is an entrepreneur. Right now, at the stage Netflix is at, it doesn’t need to constantly reinvent itself – it needs to hold a steady course and maintain a consistent customer experience. Hastings needs to move on to the next adventure, and whatever it is, I’m sure it will be successful. I give him less than a year.