Netflix Gets Social

Netflix has added a social networking element to its online DVD-rental service with the preview launch of Netflix Friends.

The Friends feature allows subscribers to invite other subscribers to join their network of friends, and then share movie reviews and ratings with them. Non-subscribers are invited in the same email to join Netflix with a free two-week trial of the service.

Friends content can be accessed from a special section of the site, where users can view movies that people in their network have recently seen, have rated highly or hated. This content is also integrated into sections around the site, with friends’ ratings and “Two Cents” — short reviews viewable only by friends — available on each movie’s description page.

“The idea is to get people to continue using the site and to share their love of movies with a larger audience,” said Shernaz Daver, VP of corporate communications at Netflix. “It combines two activities that humans love doing — interacting with one another, and watching movies.”

According to Daver, the primary goal is to provide added value to Netflix’s subscribers, which numbered more than 2.3 million when last reported at the end of September. The possibility of adding new subscribers through this effort is secondary, she said. With the entry of offline players Blockbuster and Wal-Mart into the online DVD rental market, competition for subscribers — both to grab them and to hold onto them — has been heating up.

There are a number of strategic benefits of the Friends feature — both for getting and keeping customers, according to Tony Gentile, principal with Internet industry consulting firm Buzzhit.

“The whole idea behind social networking is that it’s highly viral, and will allow them to acquire more subscribers, more quickly, at a lower cost,” he said. “If I were invited to a service that I knew nothing about by someone I knew, I’d be more likely to try it and give it a longer chance to prove itself than if I just stumbled upon it.” Customer acquisition costs could be lowered by as much as 30 percent if this effort is successful, Gentile speculated.

It also adds value to existing users by providing more relevant ratings and recommendations, and providing a sense of community, he said. “If my friends like a movie, that means something more to me than a recommendation from someone I don’t know.”

The sense of community can help reduce churn, a problem all subscription services must address. Netflix has addressed churn by lowering its prices, offering a free trial period, and making it easier for new and trial users to get up and running quickly so they receive their first movies within a day or two and start experiencing the service more quickly.

Being able to look at friends’ lists and quickly add movies to their own queue helps users move through the trial process much more quickly. The Friends feature also makes the service more sticky — users might be less likely to leave for a competing service if they know many of their friends are using Netflix.

Gentile said this is a good example of a company using social networking in a meaningful way. “It’s going to set the tone for other subscription businesses thinking about using this technology,” he said.

The problem with the way social networking has been portrayed in the industry is that it is not really a business category, Gentile said. “It’s a mechanism, a framework. It’s not a business unto itself. When people say social networking isn’t making money, it would be more fair to say that not many sites that rely on social networking to build their audience also have a reasonable business model in mind.”