NetFlix's (NFLX) novel approach, customer service as a weapon

NetFlix (NASDAQ: NFLX) has decided that the way to keep customers is to give them a lot of love. Instead of out-sourcing calls to India or making people send it e-mails about their problems, The New York Times writes that NetFlix has opened a high-end service center to handle customer problems.

In a world where contact with companies is often impersonal, the online video rental firm is gambling in the other direction. The hope is that the move will help customer satisfaction and reduce churn.

The company has probably studied the practices of rival Blockbuster (NYSE:BBI) where much of the call load is out-source and callers are told to use the company's e-mail service. A spokesman from Blockbuster said "Our online customers are comfortable using e-mail to communicate." No wonder the company's stock price is so low.

Netflix has a good reason to get religion. The Times writes that "in the second quarter of this year, Netflix, which prides itself on customer loyalty, lost 55,000 customers. Blockbuster added 525,000."

NetFlix has good reason to panic and pull out all the stops to keep customers. Its stock traded for over $30 in early 2006. It now sits just north of $17. After years of out-performing Blockbuster in the market, its shares are down substantially more than its rival's this year.

Unfortunately, whatever NetFlix does may not be enough. The market is rapidly moving to internet download of premium video products and VOD over cable. NetFlix may already be dead and just doesn't know it.

Douglas A. McIntyre is a partner at 24/7 Wall St.