NewCokeFlix
Do you think Reed Hastings was watching the Twitter feed and thinking, “Brian Stelter is tweeting from the Emmys, having fun, and thinking about motorboating Sofia Veraga and Christine Hendricks at the same time… let’s sneak out this massive announcement by customer e-mail now!”?
I have long anticipated the treacherous financial path of the move to streaming that Netflix is now in. I believe they have been in cahoots with the studios and that the studios are now puling the rug out from under them.
Some have argued that my perception that the biggest ongoing problem with this company, as a streaming business, is that the brand perception is of everything everywhere and that by jettisoning DVD as part of the under-$10 price point – even for the many who rarely used DVD service – they have broken from their core brand message, which is about being one-stop shopping for everything. It doesn’t matter whether people have way more content still available than they could ever consume in their lifetime. It doesn’t matter how excellent the films and television available are. The gimmick was, “We’re giving it all to you… and even if it takes a while to get the disc you want, you will eventually get everything you want at this amazing low price.”
Change is hard.
But this e-mail (which you can read in full after the jump) is really quite bizarre. It’s bullet points.
• We should have explained more clearly why we were making changes that some of you felt were the equivalent of a friend assaulting you.
• Oh… we were right to “assault you,” as you would put it. We should have warned your better about it coming.
• Since you’re already upset and leaving us in big numbers, we might as well tell you now… not that it matters… because the first punch wasn’t really a punch… but just in case this softens the blow… we LOVE the DVD business, but it’s unsustainable, so we’re spinning it off, giving it a new name, and separating the two parts of the company so they will no longer be fully integrated for maximum ease of use.
* But, hey, pal, we’re not charging you more for our choice to separate the companies. Aren’t you lucky?
• The envelope will still be red. Isn’t that GREAT?!?!
This is just so tone deaf… which is not the norm for Hastings. It’s like they are still trying to be your pal, Sheriff Andy, even though Andy and Barney just went and opened a strip club in Mayberry and turned out Thelma Lou and set up Aunt Bea as the madame of the whore house. “Aw, shucks, that’s good sex… and Opie has your credit card on file!”
Wouldn’t an honest explanation make more sense for Netflix? Do they assume their members are stupid just because Wall Street and media have been so easily suckered?
“Dear Netflix Customer… we loved being in the DVD business, but it is no longer financially viable… for anyone. We’re as sorry as you are. It is where we have lived all these years and built a great relationship with you, our subscribers. But the simple truth is, we cannot move forward if we live in the financial structure of the past. Shipping and distribution centers and competition from new delivery systems, including our own streaming build-out, have made the great deal we have offered you all these years impossible. And the streaming business can expand to the entire planet… all we have to do is to pay for content rights for each country, which is still remarkably cheap in most places (at least until we raise that bar).
We believe we can sustain a DVD shipping business for a couple of more years and we are going to keep offering that option to you for as long as we can. It will cost you a little more, but there is no bargain like it.
We know the future is streaming. But this is also a very expensive proposition. We are working hard to deliver as much high quality streaming content as possible. If you choose to stream only with us, there will be a lot less product available than you are used to from the DVD-to-you business. But it’s still a better value proposition than any other streaming company in the world. It is our commitment to remain the biggest, best, most easily accessed streaming media company on the planet at an incredibly affordable price of less than $10 month.
Honestly yours,
Reed Hastings”
But that’s not how they are handling it. While they are apologizing out of one side of their mouth for the last change, they are now attempting to rebrand and will, now inevitably, try to sell the new Quixter dvd-to-you brand to Dish Network or Amazon or some such interested sucker.
It’s been interesting that so many people still believe that Netflix’s consumer problem is pricing. While price matters, it is so not the issue. It’s perception. $100 a year is not a major price barrier for people… even pretty poor people. But changing the product and continuing to throw it in the face of the customers… that’s a real problem. The announcement of the STARZ deal ending… no matter how many commenters on this blog didn’t care… was another big red flag saying, “Don’t expect as much from Netflix.” And now, this homespun note of contrition and acknowledgement that Netflix just doesn’t see a future in shipping DVDs at all. Besides convenience – another core branding point for Netflix Classic – it’s primarily another shout out that this is not the Netflix you knew and loved… which in many ways is much more important than the product.
I see this as a much bigger mistake, in terms of perception, than the first change to pricing. Maybe Wall Street will like it and feel Netflix is being proactive about getting the DVD drain off of their books. But I don’t really see why Wall Street would be bullish on The New Netflix. It’s a new business and they are already getting into content cost problems that are not minor. They are lowering their game to Hulu’s, getting smaller, not bigger. DVD was the one real differentiator, other than being first in the marketplace. Now it’s not only diminished… it’s all but spun off completely… all but gone.
I’m not surprised by the move, on a business level, at all. This is about the survival of Netflix… about avoiding being the next Blockbuster. But in the game of perception, I am kinda shocked. After years of explaining Netflix spin and being told that Netflix’s public position is reality, the one thing I don’t expect from the company – which I still use and like – is self-inflicted wounds, one after the other.
Dear xxxxxxx,
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 qwikster.com 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 Qwikster.com and Netflix.com 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 Qwikster.com 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.
Notwithstanding all that, it was a great kick to get such a grovelling e-mail from a CEO. Don’t know if it will do much good, though, I haven’t looked but I’m sure they’re still getting excoriated on the blog.
And yes, “Qwikster” is a stupid name.
Qwikster was already taken by a stoner on twitter. Oops. Separately the company for a fire sale is fine, but don’t do it until you actually have a buyer.
The move to renting out games is going to really hit Gamefly, but again, that is a medium which is seeing changes in streaming too with companies like Onlive.
Either way, good post.
So Netflix wants my business so much that they are changing the name of their DVD service, they are making me go to a new website to access those DVDs, and soon enough they will be selling off my subscription to Amazon or HULU or someone else entirely.
Way to make me feel like a valued customer after all of these years of brand loyalty, Netflix.
What a strangely suicidal move from a company that’s done so much right in the past.
Getting an apology from a CEO of a huge media company is a pretty remarkable thing. But it was only just now, as I write this, that I realized that. Because it certainly doesn’t feel special. I suppose it was sincere, but the reality is they’re still going forward with a plan that destroys the essence of what made Netflix great for me for so many years. So what do I care if some guy I don’t know is sorry about it? I mean, I don’t feel “betrayed” or some such hyperbole, because I’ve gotten from Netflix everything I’ve paid for. But now the service I loved so much is something different and inferior, and that sucks.
My plan was to keep both services despite the price hike. But if you’re going to bill me twice and make me manage everything through two different web sites that don’t communicate with each other, I’m going to be asking myself why I’m keeping two different entertainment bills. I’m not going to have an answer, and I’m going to have to shed one of them. For me, that’s the streaming service.
DP – you should take over the netflix busine3s – become the CEO – it might take 6 months but you can make average people who use it happy and the the movie studios happy ..
you should write a book about netflix …just edit these posts and sell it as an ebook on amazon / apple store for 2 bucks .
Yeah, this is a very strange move, IMO. The name choice is so ungainly and the idea of managing two separate queues makes me wonder why I would feel like I necessarily need one of them. The bundle is the whole point, IMO.
They seem to be biting the bullet now, while they are still clearly on top, rather than later when it could have an even greater impact on the stock.
That said, the (expensive) stock price has fallen by half since July:
http://www.google.com/finance?client=ob&q=NASDAQ:NFLX
Ouch.
I’m still going with this Qwikster thing being the plan all along. You do not split up your services that way without their being some purpose behind it and thanks to all around customer disapproval, here we are with this nonsense.
Sure this is nonsensical but you don’t do this without there being a bigger strategy. What that strategy is right now, only those at Netflix know, but I have to ask how crazy would it be for them to buy HULU? Seriously?
I think Qwikster was the plan, too. But I think the other shoe to drop is them selling off Qwikster to someone else.
While Dave is certainly right about this being a perception issue mainly geared towards investors…
…but I’ve felt the same way as JS. Netflix has just become an incredibly attractive buy for Amazon. Bezos wants to compete against iTunes, Netflix provides the avenue. Unbox/On Demand/Instant Video – is a second-run choice.
Hastings will sell Qwikster, make millions, then 90% of his employees will get laid off, and the business will die. Somehow this is Obama’s fault.
I gotta’ say this was a really weird e-mail. It’s like one of those “We’re sorry, we screwed up, here are some free things” messages. Only, there are no free things, and they’re actually going to makes things somewhat worse for the customer (Okay, worse is too strong of a phrase, but at least more confusing).
No, worse is correct. The lack of integration between sites is definitely worse for consumers.
Would the DVD end of the equation really be unsustainable if they hadn’t paid so much for streaming?
I like the convenience of streaming, but their DVD catalog is still my main interest. When they were together, I was okay paying both prices. But if they’re trying to force me to ditch one, I’ll drop the streaming in a heartbeat.
And the name is terrible.
Joe Straatmann wrote: I gotta’ say this was a really weird e-mail. It’s like one of those “We’re sorry, we screwed up, here are some free things” messages. Only, there are no free things,”
Dude, I was thinking the same thing when I got the e-mail. I kinda skimmed through thinking, wait, am I getting a free month or what exactly?!?!
I think I need to rifle through my dvd queue cuz I doubt I’m messing w/two sites, even if it is the same price. This whole thing kinda feels like getting kicked out of a party early. ‘What’s going on?! It’s only 11 o’clock. We’re all having a good time’
Netflix: Yeah, sorry, we gave last call 15 minutes ago.”
Society: Yeah but it’s still early, there’s still half a keg and the neighbors are out of town.”
Netflix: We’ve called the cops. Stay at your own peril.”
Society: WTF?! We told everyone about this place and they brought all their hot friends! This has become the hottest spot in town. We stayed out of your parents’ room and no one’s puked in your bushes. Why are you killing it?”
Netflix: Change of plans. Sorta an afterparty. Only drinks will be on the north side of town; while the food and music will be in another locale on the south.”
Society: Yo, man, that’s messed up!”
“the studios are now puling the rug out from under them.”
You’ve been intimating this “Studios as the Mob” thing for a while now, but tell me – what actions have the studios taken that affected Netflix in the last 3 months? 6 months?
This is, currently, entirely a DVD issue – not streaming, although it may well become a streaming issue. Estimated DVD-only customers was 3mil, it turned out to be 2.2mil – a drop of 800k which represents 130% of the 600k overall drop in subscribers. Do you think they pulled that estimate out of the air? Shit no, they looked at their customer usage data and said “Hey, there’s 3million customers who almost never use streaming anyway. So if we split the subscriptions they’ll go to DVD only”. Turns out they were wrong.
So while revenues have been bumped by $0.5b annually (which means they’re sure as hell not dropping the price), this has been a PR fiasco. If it continues, it may increase dissatisfaction in Combo and Streaming-only customers who grudgingly endure the change and they’ll start throwing in the towel as well.
Honestly, I don’t know how Hastings can turn this around but it’s certainly got the capacity to get worse.
Whatever the business implications of this announcement, I’m sad to see Netflix splintering itself like this. Been a loyal customer since Oct 99. There’s very little I want to see that’s available through streaming, however, so until that’s fully ramped up — at what ultimate cost to Netflix and to the consumer? — I’ll be warily eyeing this change.
meh, I’ve had my account suspended for six months because my dvr is full. and they stopped stocking criterion blurays, which was the only thing I rented from netflix, more or less. Never used the streaming, doesn’t work on my cheap verizon internet (an episode of dexter shouldn’t take 80 minutes to watch because of all the buffering).
And I’d rather go to Vidiots anyway.
Blockbuster wishes they’d been able to survive another 18 months. if Netflix ends its disc system entirely in a couple months that leaves only redbox, and redbox can’t supply enough new releases in a netflix-less world. That means customers are going to be looking for video stores that are (now) shuttered to get their new release rentals. Blockbuster had the store infrastructure in place and would have been perfectly positioned to rise again if they’d been able to outlast netflix.
Redbox isn’t going away, but with netflix ending the dvd business (sure it’s being spun off into a separate biz, that’s just corporate speak for ‘we’re going to sell or kill the business by the end of the year), stores are going to have to massively expand their redbox kiosks, and it still probably won’t meet demand.
‘Locke, re: Blockbuster. It’s probably impossible for them to raise the capital, but if they could buy Quitsters, that would be a solid company to invest in.
Given the right buyer, there is still a lot of money to be made by Qwikster (shudder, what names did they pass over, Snailflix?). But this is a terrible business strategy to build up a company over a decade and a half only to sell it and compete against it.
Triple Option: nice.
After Netflix started mucking with the service I signed up for a 30 day trial of Blockbuster by mail. It’s priced similary to Netflix’s dvd service and it includes games.
I’ve done Blockbuster before and will again. They get many titles a month sooner but they tend to not have about 1/3 of the indies and foreign films I want to see.
@Triple Option. Hilarious while at the same time a knife in the ribs to Netflix and everything it stands for. Brilliant!
“‘Locke, re: Blockbuster. It’s probably impossible for them to raise the capital, but if they could buy Quitsters, that would be a solid company to invest in.”
Seems unlikely DISH Network would give Blockbuster the necessary spending money. It appears the only reason Blockbuster is left alive is to convert its customers to DISH subscribers.
Foamy –
You’re looking at the micro and forgetting the macro.
This is ALL about streaming, because every move Netflix has made is all about streaming. They don’t want to be in the DVD-shipping business. It disallows international expansion and the price of shipping continues to eat increasingly into the profits on that side of their business.
What have the studios done in the last 6 months? Nothing. None of this is that reactive. That’s my point. Do you really believe that this split is a reaction to what happened in the last 2 months?
Netflix has been marching here for 2 years now… slowly… knowing about the brand damage… but things were not getting better, so they had to move forward, assuming that this moment is as good, pr-wise, as it’s going to be for a while.
This all heated up in the last 14 months. That’s when Netflix started paying premium pricing for streaming, starting with the Relativity deal. It wasn’t just an increase in pricing… it was an exponential increase in pricing…. almost exactly a year after the SAG strike ended.
Since then, the domestic subscriber base has grown by 60%.
Of course they aren’t going to drop the price… as pricing is not really the issue. It’s the breaking of the presumed bond… the brand identity. Pricing is a part of that, but the discussion on content has only heated up in the last six months and has now started to be ubiquitous. And the future only looks worse. So we’re paying more or less or the sane… for less in every configuration.
Yes, Netflix has a long-term strategy that revolves around streaming. But we’re not talking about the long-term, we’re talking about the fallout from the recent changes – which is micro.
Look, I don’t know what the hell Hastings is doing, apart from trying to split the companies. PR-wise, it’s a debacle and while it’s upped the revenue it’s seriously crimped Netflix’s opportunities to expand – which is what the abnormally high P/E number was based around.
The studios themselves haven’t done shit in the meantime, and if they’re planning to watch Netflix shoot themselves in the foot and then come in with their own offerings then they haven’t been watching other streaming markets. Yeah, vertical integration has its attractions with being able to cut out the middleman, but every single digital content ecosystem shows that 2nd movers have extraordinary difficulty catching up. Android has 41.8% of the smartphone market vs. Apple’s 27%, but iTunes has 500k apps compared to Android Market’s 250k (not to mention all the music, podcasts, and movies). In gaming, the #1 publisher EA has an online store Origin, which trails Steam 4mil to 35mil users – and that’s with requiring purchasers of some of their games to sign up even if they bought it in a brick-n-mortar store.
Netflix can’t be everything, everywhere, to everyone. I don’t know why they paid inflated prices, could have been a strategy that didn’t pan out for them, could have been poor negotiation skills, could have been blinded by arrogance. But industry after industry has demonstrated that those who invest in CRM systems earlier enjoy a significant advantage – even in groceries, where giants like Tesco have a coupon redemption rate 20x that of the industry average, because they track customer usage down to the individual level. In the studios, it’s been demonstrated by WB buying RottenTomatoes – studios want that data. Netflix has it. Amazon has it. Youtube has it. And if none of the studios is perking up for an acquisition with the recent Netflix share price drops, then I have to wonder what their plans for the future are because otherwise it’s not going to be pretty.