Share with your friends










Submit

Analytics Magazine

Analyze This! Cautionary tales: Burning Man and Netflix

March/April 2012

Vijay MehrotraBy Vijay Mehrotra

I have a ticket to Burning Man 2012. But I’m not at all happy about it, and I am giving serious thought to not going this year, or ever again.

I am still a Netflix customer. But I’m no longer particularly passionate about the company, and if a better offer lands up in my e-mail box, I’m likely to very quickly take it and run, leaving the once-beloved red envelopes behind forever.

And indeed I am stunned to have written the previous two paragraphs. How did we get here?

Netflix was founded in 1997 as an alternative to video rental stores (particularly the mammoth Blockbuster chain), whose business models featured limited inventory and extensive late fees. Though it may be hard to fathom today, back then the idea of designing and running a large-scale distribution system off of a Web site was a fairly radical idea; Netflix’s core innovations were its Web site, its system for distributing DVDs and its ubiquitous red envelopes. As high-speed Internet availability became increasingly available, Netflix became a viable alternative for more and more consumers. Going public in 2002, the company prospered by focusing relentlessly on customer acquisition, operational excellence and a rich customer experience that centered on a highly personalized Web site for each customer. The results were nothing short of phenomenal: As of the summer of 2011, Netflix had a subscriber base 24.6 million customers, a market capitalization of over $16 billion and a powerful public brand [1].

Despite countercultural roots that are at odds with the very idea of building a brand, Burning Man also enjoys a highly emotionally engaged group of participants. But that’s where the similarities appear to end. Burning Man is “a cross between an extreme camping trip, an avant-garde art festival, and a massive rave party” [2]. Started as a small gathering of a few friends at San Francisco’s Ocean Beach, Burning Man moved in 1991 to Nevada’s Black Rock desert, growing and evolving significantly over time. By the summer of 2011, Burning Man had emerged as a week-long event for a diverse population [3] of participants, who are known as “burners.” During the week leading up to Labor Day, burners descend upon the flat desert space to create “Black Rock City,” a temporary urban center with more than 50,000 citizens.

Run by a not-for-profit organization, Burning Man takes place on land that is leased from the (Federal) Bureau of Land Management. In addition to stringent environmental impact guidelines that participants work hard to comply with, there has been an agreement on limiting the rate of growth for Black Rock City. In late July 2011, it was announced that for the first time ever, all of the legally allowable number of tickets had been distributed. Burning Man 2011 was officially “sold out,” and many would-be attendees spent August desperately trying to find tickets through friends, acquaintances and various secondary markets.

Netflix has for several years been aware that the growing speed and quality of video streaming had the potential to put a major dent into its DVD rental business (in the same way that its own innovations had changed the game on the bricks-and-mortar video rental industry). For several years, as both the broadband connection speeds and the explosion in the number and variety of networked devices had been growing, Netflix had very deliberately been positioning itself to provide video content through streaming video channels, and had begun to offer limited streaming content to its DVD subscribers in 2007.

In the summer of 2011, with its subscriber base and stock price both at all-time highs, Netflix decided to make a move. In July, Netflix announced that they were changing their pricing structure to separate DVD subscriptions from subscriptions for streaming content. For Netflix customers, most of whom were paying a combined $9.99 monthly bill, the new pricing would be $7.99 per month for each service, which translates to a 60-percent price hike. This led to immediate customer outrage, an immediate rash of subscription cancellations and the start of a precipitous decline in the company’s stock price.

This outrage eventually took its toll. In September Netflix CEO Reed Hastings sent a heartfelt letter [4] to all Netflix customers, apologizing for the way in which the company had handled the announcement of the new pricing plan (“we lacked respect and humility”). After falling on his sword in the first half of the letter, however, Hastings then announced that not only would the price changes stick but also that Netflix DVD delivery service would be spun off into a new company called “Qwikster” which would have separate pricing, separate billing and separate Web sites and information systems from Netflix.

While Hastings’ mea culpa was certainly welcomed, the result of this message was not only that consumers would be paying more than they had been just a couple of months earlier but also that they would have a less integrated personal experience with a company that they had heretofore simply loved. The outrage continued unabated until the ill-fated Qwikster proposal was also scrapped.

In the end, Netflix lost more than 800,000 subscribers during the third quarter of 2011, tarnished its once stellar relationship with its customer base, and saw its market capitalization fall by more than 60 percent. It is still too early to tell if or when it will return to its previous heights.

At Burning Man 2011, the dark shadow of ticket scarcity hung over an otherwise glorious week. Afterward, anxious burners waited throughout the fall months for the announcement of what changes might ticket sales for 2012. Eventually, the news came out: rather than being distributed online through the traditional first-come-first-served system that had been followed for many years, the vast majority of tickets would be distributed via a lottery system for which aspiring attendees would have a two week window to register.

Like the pricing change instituted by Netflix, the new Burning Man ticketing system generated a huge amount of outrage. Many argued passionately before it began that the lottery would radically reduce the effort required to get a ticket and thereby produce an increase in demand from new, less committed attendees. This proved to be correct: whereas only about 54,000 people had sought tickets last year, there were requests for over 130,000 tickets in the two week January lottery window.

This unprecedented and overwhelming demand for tickets in turn led to several other problems. For example, many longstanding theme camps (pillars of the city who create all kinds of sights, sounds and activities and are in many ways the lifeblood of the event) find themselves without enough tickets and wondering whether they will survive.

Similar to Hastings’ September letter, an official response was recently issued by BM Communications Manager Andie Grace (“For all the frustration, anxiety, stress and heartache this year’s ticket lottery has caused, please accept another humble apology.”). Subsequently, an official decision was made to allocate the remaining 10,000 tickets to existing theme camps, which in turn led to cries of “radical elitism” [5] and another increase in overall frustration.

With or without tickets, thousands of veteran burners have candidly questioned whether or not they will be going back this year. Moreover, for many, the sense of magic that this event has held for them is gone forever. One exasperated burner recently wrote, “I am deeply disappointed to see that your solution to the problem your board created by ignoring the warnings of the community, translates into nothing less than turning your back on the very principles the project was founded on …”

Both Netflix and Burning Man provide several lessons for today’s analytics professionals. For those of us who spend our time and energy trying to improve processes and analyze models, these are sobering reminders that our abstract representations of reality are inevitably incomplete – and that in our drive to optimize, we should be careful not to overlook the very heart of what makes a relationship special. For organizations whose strength is rooted in the passionate engagement of its community members, rapid and/or complex changes have the potential to be extremely disruptive and upsetting, with multiple unfortunate and/or unintended consequences.

Secondly, the larger the change that is being implemented, the more important it is to truly understand and communicate exactly what problem is being solved. If Netflix’s goal had been simply to increase its revenues to build its streaming library, its user community might have been a powerful source of possible solutions. In the case of Burning Man, as journalist Brian Doherty [6] observes, “I don’t know of anyone who last year intended to go and couldn’t because they didn’t get a ticket. What the organizers did was a big solution to a small problem” [7].

Finally, both Burning Man and Netflix serve as cautionary tales for the risks associated with succeeding at scale in the hypernetworked 21st century. Their growth was heavily enabled by the Internet’s ascent: Netflix’s Web site was central to the company’s business model, while the thousands of fantastic photos, videos and blogs of Burning Man that have been posted online are profoundly powerful testimonials. On the flip side, the rapid growth of an Internet-enabled constituent population means that every move will be scrutinized, and that every perceived misstep will be publicly lambasted, fairly or unfairly, not only via traditional media outlets but also through today’s social media echo chamber. There is no guarantee that even honest, well-intentioned public apologies will quiet the thundering hordes.

Hey Facebook: Are you listening?

Vijay Mehrotra (vmehrotra@usfca.edu) is an associate professor, Department of Finance and Quantitative Analytics, School of Business and Professional Studies, University of San Francisco. He is also an experienced analytics consultant and entrepreneur and an angel investor in several successful analytics companies.

REFERENCES, NOTES & FURTHER READING

  1. See for example http://brandkeys.com/syndicated-studies/loyalty-leaders-list/
  2. http://www.orms-today.org/orms-10-07/frsomething.html
  3. More details about who actually goes to Burning Man can be found at http://afterburn.burningman.com/08/census/index.html.
  4. For the complete text, see http://blog.Netflix.com/2011/09/explanation-and-some-reflections.html.
  5. “Radical elitism” was intended as an angry, ironic echo of several of Burning Man’s “Ten Principles” – see http://www.burningman.com/whatisburningman/about_burningman/principles.html.
  6. Also the author of “This is Burning Man,” Little, Brown, 2004 (http://thisisburningman.com/)
  7. http://articles.latimes.com/2012/feb/16/entertainment/la-et-burning-man-tix-20120216

business analytics news and articles

 

Analytics Blog

Electoral College put to the math test


With the campaign two months behind us and the inauguration of Donald Trump two days away, isn’t it time to put the 2016 U.S. presidential election to bed and focus on issues that have yet to be decided? Of course not.


Save



Headlines

Study: Salaries for early career data scientists decrease for first time

Salaries for early career data scientists decreased year over year for the first time in four years as did the percentage of early career data scientists with a Ph.D. while demand for data scientists continued to increase, according to a recently released Burtch Works’ 2017 salary study of data scientists. Salaries for more experienced data scientists generally held steady or increased slightly depending on an individual’s focus area, responsibility and geographic base, according to the report. Read more →

Generous health insurance plans encourage overtreatment, but may not improve health

Offering comprehensive health insurance plans with low deductibles and co-pay in exchange for higher annual premiums seems like a good value for the risk averse, and a profitable product for insurance companies. But according to a forthcoming study in a leading scholarly marketing journal, the INFORMS journal Marketing Science, such plans can encourage individuals with chronic conditions to turn to needlessly expensive treatments that have little impact on their health outcomes. This in turn raises costs for the insurer and future prices for the insured. Read more →

UPCOMING ANALYTICS EVENTS

INFORMS-SPONSORED EVENTS

CONFERENCES

2017 INFORMS Healthcare Conference
July 26-28, 2017, Rotterdam, the Netherlands

CAP® EXAM SCHEDULE

CAP® Exam computer-based testing sites are available in 700 locations worldwide. Take the exam close to home and on your schedule:


 
For more information, go to 
https://www.certifiedanalytics.org.