Qwikster off to a slow start

September 29, 2011

Last week I got an email from Reed Hastings, co-founder and CEO of Netflix, that began, “Dear Emma, I messed up. I owe you an explanation.” Well thanks, Mr. Hastings, but … excuse me? I do have a Netflix account, but the letter seemed a little more personal than anything I usually hear from heads of major companies.

Since 2004, my family and I have been loyal subscribers to Netflix, the company that has dominated the movie scene during the Internet era, providing movies and TV shows to home viewers, first as a snail-mail-only service, and then expanding its business to include streaming video content. I consider Netflix streaming videos the best gift my mother ever gave me (free access to every episode of 30 Rock whenever I want, sans exorbitant Gelardin late fees? Yes please).

Despite the service’s obvious benefits, over the past two months, Netflix fans and observers have mounted a full on protest via Facebook and Twitter against the company’s poorly-rolled-out price hikes, website changes, and now—perhaps worst of all—the announcement to soon spin off its DVD-shipping business as an independent company called Qwikster.

The new pricing scheme—a shift that doubled rates for those who subscribe to both the streaming and the mail services—was cast as a necessary step to cover the cost of mailing DVDs while providing more money to spend on licenses for streaming content. DVD by mail is expensive, outmoded, and no longer viewed as a growth business for the company, but the subsequent negative press and customer feedback that the shift has garnered has certainly not helped the company’s sudden decision to split its business in two.

In his email, Hastings compared Netflix to companies like AOL and Borders bookstores—companies that are great at what they do, but fall behind when they fail to adapt their initial business models to changing technology. As Hastings and others have said so many times, Netflix believes that streaming is its future and is trying to get users to go all-in on the service in order to help it continue to grow and be self-sustaining as an independent business. This business split may be the death of DVD-by-mail, so separating the DVD division of Netflix from the rest of the company might let it better focus on that future.

So what’s the big deal? Netflix disrupted, and eventually superseded, the previously dominant Blockbuster model for movie rentals. Hastings is probably paranoid, then, that Netflix is vulnerable to the same kind of disruption. Isn’t Netflix just trying to stay ahead of the curve? Hastings inadvertently answers this question in his message when he observes that “it is possible we are moving too fast.” It seems, however, that it is this same enthusiasm for keeping business fresh that is at the center of Netflix’s recent problems.

In the process of all this smart business, though, Hastings seems to have forgotten the most important part of any business—the client.

Companies that truly value their customers make the customer experience as seamless and easy to understand as possible. What Netflix had done seems to be the exactly the opposite. My mom has a hard enough time as it is figuring out how to make our DVD player work—with the doubled price and hassle of juggling two different movie accounts, she is more likely to run out to Target and pick up a copy of whatever she’s interested in watching. No one questions that Netflix provides a valuable service to its customers. But subscribers disgruntled by all the jerking around can easily back out of the service altogether, and many have.

Despite the loss of customers (and the recent loss of content from Starz), Netflix told investors it still believes “that the splitting of our services was the right long term strategic choice.”

They might be right. The key advantage of Netflix’s new model is that it will give each side of the business—the DVD side and the streaming side—flexibility to manage its service in a way that pleases its own customers. As a combined service, any move to strengthen one side of the company over the other would have been perceived negatively by one group of customers. Netflix believes that its DVD shipments will peak in 2013; after that, as fewer and fewer people subscribe to DVDs, it’s going to have to raise prices to support the physical infrastructure needed to ship out the discs.

So yes, for those of us who like using both streaming and DVDs, these changes really stink. But consumers should understand that it’s not the result of an accident or lack of foresight on Netflix’s part—it’s the opposite. That is, if you think that Netflix’s new pricing and the company’s division into two entities is an alienating move, you’re right. That is the point. Whether the company will be able to avoid a subscriber exodus and the collapse of their stock price, meanwhile, remains to be seen.


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