Netflix CEO Offers Apology and New Plan for Business

Discussion
Sep 20, 2011
George Anderson

Back in July when Netflix eliminated its single $9.99 monthly subscription plan, which combined DVD and streaming rentals, in favor of two separate $7.99 plans for home and online delivery, a large number of the service’s customers were more than a little put out. That unhappiness was borne out in the company’s most recent financial report, which showed it losing subscribers.

Now comes a mea culpa, of sorts, from Netflix CEO Reed Hastings.

In a statement published on the company blog, Mr. Hastings wrote, "It is clear from the feedback over the past two months that many members felt we lacked respect and humility in the way we announced the separation of DVD and streaming, and the price changes."

Mr. Hastings goes on to explain that he has worried greatly over the past five years over how Netflix would move from its home DVD delivery model to streaming movies and programs online.

"In hindsight, I slid into arrogance based upon past success. We have done very well for a long time by steadily improving our service, without doing much CEO communication. … But now I see that given the huge changes we have been recently making, I should have personally given a full justification to our members of why we are separating DVD and streaming, and charging for both."

Mr. Hastings goes on to explain that Netflix realized that DVD by mail and streaming were two distinct businesses that needed to be marketed differently so that they could grow independently.

The result of this soul searching is that Netflix is renaming its DVD by mail service "Qwikster." Subscribers will now go to qwikster.com to order DVDs and manage their accounts. Programming that consumers stream online will still be available through Netflix. Mr. Hastings maintains that splitting the two businesses up on different websites will make them "easier to use."

Mr. Hastings also admits some possible shortcomings.

"A negative of the renaming and separation is that the Qwikster.com and Netflix.com websites will not be integrated. So if you subscribe to both services, and if you need to change your credit card or email address, you would need to do it in two places," he wrote. The same is true of reviews that would need to be reentered separately on both sites.

Mr. Hastings properly concludes that there will be some who will scratch their head over this move. Ultimately, however, he believes the businesses will be improved as a result.

Not all of Netflix/Qwikster customers seem to agree, based on the company’s Facebook page.

Here are two excerpts from comments:

  • "The whole reason I got Netflix was for the convenience. You guys are really shooting yourselves in the foot with this. I was willing to deal with the 60 percent price hike, but not this. This is the worst business move I’ve ever seen."
  • "Just call it QWITSTER, because if you separate the services, I will quit at least one if not both. Are you out of your minds?"

While there is little argument that streaming is the future of the movie rental business, at least one analyst called the Netflix move "premature" because of the nature of the relationship between the company and the movie studios.

Wedbush Securities analyst Michael Pachter told The Wall Street Journal, "On the DVD side, the studios have zero ability to raise price. On the streaming side, the studios have 100 percent leverage."

Discussion Questions: What do you make of Netflix’s latest move? What would you suggest it do next?

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18 Comments on "Netflix CEO Offers Apology and New Plan for Business"


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Warren Thayer
Guest
9 years 7 months ago

The letter just glides over the entire issue of why this was a good idea, with no real explanation. I figure they just wanted to balance things out — since they’d already shot themselves in the left foot, it probably just seemed proper to even things out by shooting the right foot also. Symmetrical, you know?

Bob Phibbs
Guest
9 years 7 months ago

I must say I got Netflix because it was easy. Making it complicated and raising prices makes me wonder what’s behind all of it. You don’t often see a trusted brand implode in real time.

Al McClain
Guest
Al McClain
9 years 7 months ago

Let’s just call this “DUMBSTER.” So, Netflix ticks off its customers via a large price hike (NOT because of the way they announce it) and they try to fix that by forcing consumers to use two different websites and accounts to get what they had, easier and cheaper, before? Are you kidding??? Worst customer service move I have seen in a long time.

Dr. Stephen Needel
Guest
9 years 7 months ago

This has the potential to go down as one of the great marketing disasters in history. And the latest communication does nothing to make things better. As an early adopter of Netflix, the last thing I care about is hearing from the CEO — so his arrogance continues. The problem was not a lack of communication, the problem was bad research (if they did any) that failed to predict users’ reactions.

A massive price increase (about 60%) in poor economic times can’t possibly be a good business decision. They could have maintained the linkage between the two businesses, offering lower prices for each one separately or a nice deal on both (say, a 20% increase), then gradually raise prices if needed.

Doron Levy
Guest
Doron Levy
9 years 7 months ago

It’s easy to harp on the past but, when it comes to Netflix, it’s just so much fun to dwell on their mistakes. Here you have a company which basically put Blockbuster out of business, and now they want to mess around with the core business that made them great. Let’s raise prices and make it more difficult for the consumer to get the product they are so dearly after.

I can understand the need to go streaming. Yes there is a business there. But why screw up what already works? Changing names, additional steps, different websites, increased pricing. Doesn’t make any sense to me (and I’m sure thousands of subscribers). Netflix should refocus on what made them famous. An apology filled with explanations on a blog isn’t going to solve their problems.

Dr. Emmanuel Probst
Guest
Dr. Emmanuel Probst
9 years 7 months ago

The next 6 months are going to be life changing for Netflix. The deal with Starz went away, which means movies from Disney and Sony will shortly disappear from the website. As suggested by M Patcher from the WSJ, studios have leverage on the streaming side, which means Netflix will have to pay a lot more (some say 10x) in order to make content available to its users. Will the price hike outweigh the cost of acquiring content and the churn in Netflix’s client base? From my standpoint, the party is over.

Paula Rosenblum
Guest
9 years 7 months ago

If you want to amuse yourself, go to Twitter and see who owns the handle Qwikster (reported by Mashable this morning).

This has to be the most poorly executed set of decisions in the history of corporations. Makes “New Coke” seem like a roaring success.

Camille P. Schuster, PhD.
Guest
9 years 7 months ago

Absolutely a bad business move. That “apology” was all about justifying company decisions and had nothing to do with providing service for consumers. At one point Netflix phones had a 26 minute wait time and it took a long wait to get on the website. This “apology” only made matters worse. This may be a case of bad publicity actually being bad for the company.

Jesse Rooney
Guest
Jesse Rooney
9 years 7 months ago

Splitting the business after implementing a price hike is shockingly absurd. It just gives Netflix’s customers an excuse to end their service.

Dick Seesel
Guest
9 years 7 months ago

I might as well pile on … I got the e-mail from the CEO yesterday and was scratching my head after reading it. Netflix has managed to mess up great brand equity in record-breaking time, and now compounds the problem by changing the name of the part of the business that worked in the first place. (There’s nothing in the “mea culpa” about the lousy selection of streaming movies, which is the underlying challenge.) Would any retailer moving from single-channel to multi-channel (which is essentially what Netflix is doing) drop the brand name from the core business that built its reputation in the first place?

Frank Beurskens
Guest
9 years 7 months ago

The Netflix case, beyond the brand switching question, brings up a fundamental question: Is strategic differentiation and sustainable competitive advantage possible in technology today? In the classic “What is Strategy,” Michael Porter at Harvard states: “A company can outperform rivals only if it can establish a difference that it can preserve.” The Netflix decision to split into two distinctly different delivery channels, per Porter, may be the right thing to do since they require distinctly different strategy. Streaming video seems difficult to preserve as a competitive advantage given the ease of entry and ubiquitous infrastructure. The old fashion mail delivery system has a few more barriers to entry. I wonder which service will end up being the sustainable one?

Adrian Weidmann
Guest
9 years 7 months ago
Having been involved in the record and video production businesses, I too believe the move was premature. There has always been an adversarial yet symbiotic business relationship between the studios and theaters. The technology for Digital Cinema has been around for many years, yet the studios were slow to adopt due to security issues and the fear of losing control of the ‘master’. In the ‘analog’ world, the studios could control the rate at which they released their product to different channels. First, of course, was theaters and months and years later was television and video rentals. The digital world completely compressed this timeline and its revenue model to nothing. When a studio releases a film in our digital world, it immediately is available — legally or not — to all media channels. Theaters are now ‘home theaters’ and mobile devices are further stressing the theater business. Studios continue to improve digital encryption and distribution technologies and with it their ability to have 100% control over the distribution and revenue flow of their ‘product’. As… Read more »
Tina Lahti
Guest
Tina Lahti
9 years 7 months ago

When I first received notice of the 60% price hike, I wondered about the reasoning behind the decision. It seemed that the change was designed to get rid of subscribers like me who underutilized the service yet are happy to keep paying the monthly subscription fee. The e-mail apology seemed to be about applying a backward looking and disingenuous spin on a very bad business decision. I believe that, as separate entities, Qwickster and Netflix will have trouble competing. For $7.99 per month, I could get 8 Red Box movies or stream to two new DVD releases at VUDU. Or I could stream as many current TV episodes as I wanted to on HULU Plus. I will be cancelling my subscription entirely.

Lisa Bradner
Guest
Lisa Bradner
9 years 7 months ago

The biggest issue I have is that Netlix is making its business model problem — the fact that it doesn’t have streaming rights to anything near the content for which it has DVD rights — the customers’ problem instead. In a hugely competitive world where everyone is fighting over access to content (the cable companies, Amazon, the movie companies, Hulu, you name it), Netflix lost track of its biggest competitive opportunity — a strong subscriber base and a habitual distribution, access, and “wish list” model. The one thing they had to leverage they just blew up with this move. It makes no sense.

Mark Price
Guest
Mark Price
9 years 7 months ago

I must confess to being a bit confused about the strategy behind the move. If the goal is to capture an increasing share of customers’ spending on movies and video entertainment, then the logical approach is to increase bundling, not to create two separate identities with distinct positioning and customer experience. The multiple log-ins required also violates a key web rule: “minimize the number of clicks whenever possible.”

The more distinct the brands from each other, the more complexity in the minds of customers. Much market research demonstrates that increased complexity leads to reduced participation in the category as a whole, as well as declines of both brands. All in all, not a great idea.

The only reason I can imagine for such a shift is that Netflix must be planning on spinning off or selling one of the businesses and having them distinct makes for an easier transition to a new acquirer.

No matter what, I cannot see the customer winning out on this one.

Ed Dennis
Guest
Ed Dennis
9 years 7 months ago
Netflix’s latest move has, and is, generating more discussion by actual Netflix customers (those actually paying the bills) than the price increase generated. Maybe the customers were taking too much for granted – I don’t know. However, it is pretty darn clear that Netflix is taking their customers for granted. Who has ever put together a business plan to make it harder for your customers to do business with you? The fact is that the paradigm is changing and Netflix doesn’t seem to have any real lock on Streaming Video. Their selection is not appreciably better than Hulu+ or Amazon or Blockbuster. They may have a temporary edge in buffering, but that’s a software advantage and everyone else will be able to figure that out. It would appear that the power in this equation has shifted back to the movie studios. I predict that each will set up their own streaming sites and sell directly to the public. What could be more perfect? NO MIDDLEMEN! Isn’t this the dream of any producer of any product?… Read more »
Per Sjofors
Guest
Per Sjofors
9 years 7 months ago
“I don’t think any of us doubt that DVDs and BluRay eventually will go the way of 8-track audio cassette and VHS tape. To be replaced by streaming video services. And Netflix wants to help the market accelerate that transition. “Netflix killed Blockbuster and the video rental stores. Amazon and Apple are building out streaming services as fast as they can. If Netflix did not lead that transition, there is a grave risk they also would be superseded by companies with far greater resources. A risk they decided not to take. The only competition you need to eventually kill your existing business is yourself. Because if you don’t do it, somebody else will.” I wrote this in my blog on September 16. Then on the 19th, the apology from Mr. Hastings came out: “Mr. Hastings, the Netflix CEO explained he had been afraid that Netflix might be too slow in its transition from physical media to digital and suffer the fate of the recently bankrupted Borders bookstore chain.” While the whole transition has been poorly… Read more »
Phil Rubin
Guest
9 years 7 months ago

Netflix has done nothing more than to accelerate its pending obsolescence. Their moves reflect not only panic but, and this is nothing new, very little thought about their customers. Fascinating case study, especially as a follow-up chapter to the one on Blockbuster!

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