Netflix: Can A Company Really Be This Inept And Succeed?

NetflixIf you thought Netflix handled its earlier price increase badly, just wait till you hear the complaints about its latest move. In a letter to subscribers sent today, Reed Hastings, Netflix Co-Founder and CEO, opens with:

“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.” – Hmm, perhaps a little bit of an understatement! (Read the full text at the end of this post.)

So members like me might be lulled into the false impression that this letter was going to be an apology in an attempt to smooth things over. Boy, was I wrong. Instead Hastings goes on to say the following (my paraphrasing, not his):

  • Because you are such a good customer, renting both DVDs and streaming, we’re going to degrade your service.
  • We know you like the fact that you can easily move movies between your online queue and your instant queue, which is why we’re going to stop you from doing that.
  • We know you liked the fact that a movie in your DVD queue is added to your instant queue automatically when it becomes available for instant viewing – so we’re going to stop allowing that.
  • We recognize that our website, with its easy-to-use features is one of the reasons you use our service, so we decided to give you twice the benefit by breaking it into two websites and asking you to use the two sites instead of one.
  • We won’t be increasing our prices as a result of reducing your service levels – we already did that.

The thing is, as I continue my research for CIOs on the intersection of IT and Marketing, I’m focusing on what IT and marketing can do to improve customer value and create a unique customer experience. In fact, I’ve often held Netflix up as doing the right thing for its customers by mastering the customer data flow. So when I see a “strategy” like this that purports to be in the interest of the customer, but which is transparently not in the interests of the customer, and which certainly decreases the value to the customer, I can only say this is the opposite of what we mean by becoming customer-obsessed!

When a company begins to lose its leadership in customer service by focusing on appeasing Wall Street, the writing may be on the wall (or in the email from the CEO). What do you think? Share your comments below.

The full text of Reed Hastings’ email reads:


I messed up. I owe you an explanation.

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. That was certainly not our intent, and I offer my sincere apology. Let me explain what we are doing.

For the past five years, my greatest fear at Netflix has been that we wouldn't make the leap from success in DVDs to success in streaming. Most companies that are great at something – like AOL dialup or Borders bookstores – do not become great at new things people want (streaming for us). So we moved quickly into streaming, but I should have personally given you a full explanation of why we are splitting the services and thereby increasing prices. It wouldn’t have changed the price increase, but it would have been the right thing to do.

So here is what we are doing and why.

Many members love our DVD service, as I do, because nearly every movie ever made is published on DVD. DVD is a great option for those who want the huge and comprehensive selection of movies.

I also love our streaming service because it is integrated into my TV, and I can watch anytime I want. The benefits of our streaming service are really quite different from the benefits of DVD by mail. We need to focus on rapid improvement as streaming technology and the market evolves, without maintaining compatibility with our DVD by mail service.

So we realized that streaming and DVD by mail are really becoming two different businesses, with very different cost structures, that need to be marketed differently, and we need to let each grow and operate independently.

It’s hard to write this after over 10 years of mailing DVDs with pride, but we think it is necessary: In a few weeks, we will rename our DVD by mail service to “Qwikster”. We chose the name Qwikster because it refers to quick delivery. We will keep the name “Netflix” for streaming.

Qwikster will be the same website and DVD service that everyone is used to. It is just a new name, and DVD members will go to to access their DVD queues and choose movies. One improvement we will make at launch is to add a video games upgrade option, similar to our upgrade option for Blu-ray, for those who want to rent Wii, PS3 and Xbox 360 games. Members have been asking for video games for many years, but now that DVD by mail has its own team, we are finally getting it done. Other improvements will follow. A negative of the renaming and separation is that the and websites will not be integrated.

There are no pricing changes (we’re done with that!). If you subscribe to both services you will have two entries on your credit card statement, one for Qwikster and one for Netflix. The total will be the same as your current charges. We will let you know in a few weeks when the website is up and ready.

For me the Netflix red envelope has always been a source of joy. The new envelope is still that lovely red, but now it will have a Qwikster logo. I know that logo will grow on me over time, but still, it is hard. I imagine it will be similar for many of you.

I want to acknowledge and thank you for sticking with us, and to apologize again to those members, both current and former, who felt we treated them thoughtlessly.

Both the Qwikster and Netflix teams will work hard to regain your trust. We know it will not be overnight. Actions speak louder than words. But words help people to understand actions.

Respectfully yours,

-Reed Hastings, Co-Founder and CEO, Netflix

p.s. I have a slightly longer explanation along with a video posted on our blog, where you can also post comments.

Next post: Netflix Revises Strategy ..... Again!

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Frustrating now, but likely a smart long-term strategy

I get what you're saying, and might even have a similar reaction as a customer had I not dropped the DVD portion of the service a long time ago. And, I'm currently likely to drop the streaming service too, unless the catalog gets seriously deeper.

But, as an overall business strategy, I'm impressed with these moves. They are bold, controversial, and upsetting in the short-term, but likely will prove to be the best strategy in the long-term. I can't express it nearly as well as Mark Suster did in his post earlier today, so I'll just link to it:

Why Reed Hastings Should be Applauded for Netflix Split:

The right long-term strategy?

Hi Tom,

And thanks for your comments as well as the link to Mark's post.

The interesting thing is I might be inclined to agree on the surface that splitting the business in two makes sense -allowing each to compete for its customers as a stand-alone business - so from a classic business strategy perspective this makes complete sense. Interestingly, this is almost exactly what Blockbuster did when it setup its online business to compete with Netflix - and we know how well that worked for them! When setting up its businesses to compete with Netflix, Blockbuster proactively tried to switch customers away from its stores and into online sales - rather than focusing on what its customers wanted (if I went to a store maybe it was because I wanted a good in-person customer experience - which is why stores with great service staff always attracted more customers).

In splitting its business in two, Netflix has effectively opened the door to any competitor able to compete effectively either online OR through the mail - it has given up one of its biggest competitive barriers - the ability to seamlessly service households across both the digital and disc. Not only that, but it has seriously reduced the quality of its service to any of its customers who both stream and rent DVDs.

While this could only be a good strategy if the intent is to sell off the DVD business, to suggest that the company is unable to leverage the streaming business model while it continues to support customers who rent DVDs seems amazing to me. Certainly this move shifts the company away from the DVD rental business. Maybe a standalone DVD rental business will be successful alongside a stand-alone streaming business – the real failure in strategy here is the inability of the Netflix team to see a way forward that allows the businesses to be split while maintaining a single customer interface – one that increases customer value.


A split decision....

I agree that maybe part of this strategy could include a more seamless user experience for customers of both services. That would be better from an end-user perspective.

Still, I'm firmly in the Clay Christensen camp on real innovation coming from a dominant player to make a move such as this, essentially competing with (an ultimately, attacking) itself before others do.

It will be interesting to see how this all plays out.

Duping customers

The I-am-powerful-and-invincible-and-can-bully-the-heck-out-of-YOU-the-customer days are gone, or going fast. Now that I'm looking, I'm starting to see The New Paradigm (PR 2.0, Gov 2.0 etc.) manifest itself in various places. We still have the BPs and TEPCOs (and NRC's) but I believe progress is being made. Surprisingly, ethical two-way symmetrical conversation (not pitching) is a win-win for both company and customer.

Would make a good three-act play:

CEO: "You mean, if I keep the conversation going and listen (not just "keep tabs") to my customers I can make more money AND keep me and the customers happy at the same time?

SocialMediaPRExpert: "Um, yep." [shaking head, heading for coffee machine]

Your last sentence said it all.

"When a company begins to lose its leadership in customer service by focusing on appeasing Wall Street, the writing may be on the wall (or in the email from the CEO)."

Duping customers

You've got it Bruce ... In the age of the customer we need to change our strategic paradigms.

A Poor Communication Strategy

I am not sure anyone can tell whether this is a good or bad business strategy. Time will tell. They might lose a fair share of US customers in the short run but grasp a larger global share in the long run.

Now what Netflix (and HP) have in common is this: they've definitively failed with their communication strategy.

A poor communication strategy

Bertrand you are spot on re their communication strategy .... Unless the strategy was to upset as many customers as possible ... In which case they did pretty well. It seems many of the people who are not bothered by this move are either not Netflix customers or only subscribe to one service or the other. This move is really only detrimental to their biggest customers.

And you are also right that we can't yet tell if this is a good strategy ... But the whole point of developing strategic plans is to try and predict the future outcomes of one strategy over another. What's not clear to me is why they needed to restructure the customer interface to degrade service in order to gain the benefits from running the two sides of the business as their separate companies - it's not like they were forced into that choice ... All I'm suggesting is perhaps they would have been more effective had they figured out how to run the online streaming business separately while still leveraging a shared customer portal. So the only conclusion I can come to is that they did this to sell off the DVD business. If they do that, I'll be interested to see if the buyer then builds a streaming business alongside it.

One thing is for sure, the streaming of digital content is a business model that is just beginning ... The barriers to entry are relatively low and the switching costs for consumers are zero. The one thing that will attract customers is content, and that's an area that Netflix is about to find increasingly competitive as content producers learn how to stream their own content without the middle man.

Nigel, I agree with your

Nigel, I agree with your assessment that the only logical reason for splitting their business into two companies is with the view of selling off one of the two entities. Unless they've already received an offer on their streaming business upon the condition that they would split their DVD business into a separate entity.

It's hard to see how Netflix can win the streaming battle down the road as nicely highlighted in this CNN Money article: Most of the buzz these days is around 'who might be buying Hulu'. We might want to start asking ourselves 'who might be buying Netflix'

Update: About Turn

In an abrupt about turn, Netflix has reversed its strategy