< Peeved about Pocahontas (5x8 - 9/19/11) | Main | The Polish, Italians, Swedes, Norwegians and Latinos >

It's the movies, stupid

Posted at 10:36 AM on September 19, 2011 by Bob Collins (25 Comments)
Filed under: Economy

Not having a masters -- or anything else -- in business, it's hard for me to see the wisdom of the announcement that Netflix is separating itself into two companies -- one that will mail you DVDs, and one that will sell you streaming video. Still, one easily gets the feeling we're watching how a CEO can take a company and drive it into the ground.

Reed Hastings, the co-founder of Netflix, must've had that feeling too, because his announcement that Qwikster will now handle DVD mailing as a separate company started this way...

I messed up. I owe everyone 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. I'll try to explain how this happened.

Over the summer, Hastings had announced a huge price increase for Netflix (the DVD Netflix, I mean, Qwikster. Or whatever), which caused people to drop the DVD portion and stay with streaming, a service that has a much smaller film library. The stock plunged.

In his apology today, Hastings announced his company's -- companies -- new direction:

So we realized that streaming and DVD by mail are becoming two quite different businesses, with very different cost structures, different benefits that need to be marketed differently, and we need to let each grow and operate independently. It's hard for me to write this after over 10 years of mailing DVDs with pride, but we think it is necessary and best: 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, and now that DVD by mail has its own team, we are finally getting it done. Other improvements will follow. Another advantage of separate websites is simplicity for our members. Each website will be focused on just one thing (DVDs or streaming) and will be even easier to use. 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. Similarly, if you rate or review a movie on Qwikster, it doesn't show up on Netflix, and vice-versa.

Got that? In order to serve customers better, and to ensure that Netflix won't go the way of AOL and Border's, Netflix is going to make the process of patronizing it -- them -- ridiculously complex.

Give Hastings credit. On his blog, he's "mixing it up" with his customers who seem to universally hate his idea.

This comment from a customer in San Francisco, for example, seems ideally suited as the basis for a full semester class at Wharton:

You're continuing to make a classic mistake: thinking you're something different than what everyone believes you are. You're not a DVD company and a streaming company: you're where I go to watch movies. That's it. The future clearly is streaming, but by separating and charging more for access, you're wildly less valuable to me. I'll likely cancel. You haven't listened to customer feedback. You're delusional and you're lost.

And Ben Thompson of Maple Grove points out -- accurately -- that separating the companies makes it much more difficult for the people who want the advantages of each.

If queues aren't integrated it's huge detriment for customers who subscribe to both services. We need to see which titles on qwiskter are available on netflix in order to use both effectively.

Hastings' response? Basically, "you're on your own."

"ouch. You'd have to search the second place if we didn't have it in the first place."

Somehow, this all made sense at a meeting of Netflix execs.

Then, again, maybe they didn't have a choice but to toss a Hail Mary. Check out the stock price since summer (click image for big view):

In the last quarter, Netflix lost 1 million customers. It keeps making mistakes. In the last few months it botched the price increase, it let Starz (which provided much of the content) walk away, and it prevented households from streaming on more than one device at a time.

The company is providing a great test case: Is the content provider more powerful than the consumer? In this case, consider Netflix the consumer, and Hollywood as the content provider. It's a fine example of the "you'll take what we give you; good luck finding it somewhere else" economics.

The stock is significantly higher today on a day when the rest of the market is tanking.

Comments (25)

And seriously, "Qwikster"? What a dumb name.

Posted by Heather | September 19, 2011 10:51 AM

Netflix isn't the only game in town, but they did a lot more for a good price.

And in that I live in southern California, they have almost as many distribution centers as there are medicinal cannabis dispensaries.

I'll now be heading to the library for dvds. Not nearly the selection, but at least the rental fee goes to a good cause.

I'm gonna research streaming options. Any suggestions?

And I still like to go to the movies for the new releases and indi, sub-titled art flics that I really care about. (That is, if I can find the time when I'm not taking the little monsters to the newest animated cg stuff in 3D full motion smell-O-vision.)

Posted by Jim Shapiro | September 19, 2011 11:11 AM

all this Netflix mess makes me happy I dumped them last spring. so now no Cable, no satellite and no netflix....I may as well have no TV. works for me

Posted by brian | September 19, 2011 11:15 AM

I'd caution against reading too much into the stock price. If we've learned anything in the past three years (and we haven't), it's that investors are spoiled, temperamental brats.

Still, Netflix obviously screwed up, but it hasn't irked me as much as it has other customers of theirs. I dropped DVDs and honestly, I don't really care. We don't watch that much TV. Sure the streaming selection sucks, but it still blows the doors off Comcast's assortment of shopping channels, endless Law&Order reruns, the golf channel, what else...?

Posted by Disco | September 19, 2011 11:46 AM

Another thought that has occurred to me, and occurred just now as I read all the vile screeds on the Netflix blog.

Netflix is for entertainment. It's a luxury. That's all it is. You can't eat DVDs. I think a lot of these people need to move on with their lives.

Posted by Disco | September 19, 2011 11:53 AM

if I was a company such as Amazon or Google I might jump at the chance to buy Netflix out before they lose all their customers.

Posted by bench | September 19, 2011 12:04 PM

Want to know why Netflix stock has dropped from $300 to $150 in just three months?

ITS THE STUPID CEO!

Posted by THOMAS MC | September 19, 2011 12:11 PM

If you're looking for alternative streaming options, check out a Roku box combined with Amazon Instant Video.

Personally, I think Netflix is posturing for a buyout from Microsoft.

Posted by Tyler | September 19, 2011 12:18 PM

No one is under any obligation to care about Netflix or to post about Netflix.

Consumers have a right to question the worth of their investment and the way they're treated by a business. In many ways, customer service is a big part of a better economy.

It's a relevant discussion.

Posted by Bob Collins | September 19, 2011 12:18 PM

At least it is better than satellite radio... Sirius has it to where when you sign up, you sign up for life (to end it you HAVE to pay a cancellation fee).

Posted by bench | September 19, 2011 12:36 PM

They could jack their prices to $30 per month and you'd still be saving a ton of money over renting DVDs (remember when people actually did that?). People need to take it down a notch.

Someone above mentioned stockholders and temperamental brats. Clearly, some of the customers need to be grouped into the same category.

Posted by Adam_S | September 19, 2011 12:45 PM

Netflix (NFLX) has lost more than 40% of its value in the last 3 months; over 20% in the last month alone.

One has to wonder if this suicidal decision (or set of decisions) is part of some weird scheme to devalue the company. Is Mr. Hastings, abetted by the rest of Netflix's Board of Directors, deliberately trying to sink the firm's stock?

If so, might it merit investigation by the SEC?

If not, then their stupidity in this move is beyond astounding.

Posted by Sperry | September 19, 2011 12:54 PM

This is a classic case of a business taking enough market share to become the main provider, and then jacking the prices once most of the main competitors have been weakened or gone out of business.

As for myself I will probably drop streaming, and look at the options Blockbuster mail distribution has - the number of videos dropped yesterday from my instant queue (approx. 20) tells me that to pay for streaming is not worth it

Posted by Russell Brown | September 19, 2011 1:15 PM

This is simply a convenient way to drop the physical medium business in a few years--the artifact of the CD, DVD are history--and this company knows it. In a few years, I bet the mailing business will be closed.

Posted by Jeffrey Scherer | September 19, 2011 1:17 PM

I've never been a Netflix customer. I can't remember the last time I rented a movie from Blockbuster, Redbox, or any other physical location. Instead, I get my movies for free from the library (Hennepin County has an amazing selection).

I bring that up because some people seem to think that Netflix customers are "whining." Well, as a non-Netflix customer, I agree with the customers that this is a horrible move on Netflix's part. It seems to me that they're following a business model dictated by the way they handle their internal operations, rather than their customer's needs and wants.

Does Blockbuster still stand a chance at revival? Because this just might do it.

Posted by B | September 19, 2011 1:19 PM

Absent from this post or any of the comments is any discussion of how Hollywood has been jerking Netflix around since their inception. As Hollywood withdraws more and more content from providers like Netflix, Netflix adapted itself to the new rules, but did not successfully anticipate just how relentlessly the movie studios would keep changing the rules to maximize their profits.

Netflix excelled at giving customers what they wanted despite the movie studios' insanely obstructionist distribution models (they all want to be Disney and rerelease each movie every seven years, while still getting all that DVD rental money). Streaming is Netflix's future, but the movie studios simply refuse to reconcile their business model to accommodate Netflix or other digital providers, even as they refuse to set up their own digital distribution channels.

What we, the consumers, want is irrelevant. The MPAA will continue to stab their distributors in the back (not just Netflix) while disregarding consumer wishes for digital distribution channels. You want to see movies on your TV? Pay for cable or a dish and then pay again for pay-per-view. Sports have all but disappeared from broadcast TV thanks to greedy collaborations between taxpayer-subsidized teams and cable/dish outfits, and new movies will disappear from free TV next.

Posted by Mark Gisleson | September 19, 2011 2:49 PM

As a stalwart DVD-by-mail customer, Netflix is trying their darndest to prevent me from purchasing their service. I am well aware Netflix would like all of their customers to adopt the streaming model so they can get rid of costs such as postage. When Netflix raised their prices by 60%, I dropped the streaming service. I rarely used it. I like receiving my DVDs by mail; I use their service more when I am receiving the physical product.

New name, new company, new website (will my queue be preserved?) -- Netflix is trying their darndest to get me to switch. Like Jeffrey Scherer, I wouldn't be surprised if the DVD-by-mail service is discontinued in a few years.

It's irksome. Netflix, I would just like to continue purchasing your original product as is.

Posted by Cathryn | September 19, 2011 3:01 PM

The Oatmeal did a good take on it in their most recent comic

Note though that they switched servers and it might not show up right away (hit refresh).

Posted by bench | September 19, 2011 3:13 PM

I chose streaming only because I did not see the option of DVD only when the price increase happened. The selection on streaming is poor. If this separation lets me choose DVD only at a reasonable price, then it is a step in the right direction for me. I will drop streaming.

Posted by John p. | September 19, 2011 3:34 PM

//bsent from this post or any of the comments is any discussion of how Hollywood has been jerking Netflix around since their inception.

(Click the links in the piece)

Posted by Bob Collins | September 19, 2011 3:42 PM

Why I stayed with Netflix in spite of the price hike:
I prefer to pay instead of download stuff illegally;
I still want the DVD features because streaming does not allow me to
be sure the copy is good or in the correct aspect ratio;
watch the bonus features, the director's commentary, the "making of" stuff;
have access to closed captioning;
switch the language to one you prefer, or change the language of the subtitles;
have access to a much wider selection of films including older films, foreign films, stuff that is not the flavor of the month or TV.

By separating the services, Netflix is aggravating long-time loyal customers like me, who want to be able to switch back and forth between mail and streaming queues without loading a new website. I do not have a TV; I don't pay for cable. Hulu and MUBI do it for some some content, but Netflix was still the place where I got the most for my money. If Netflix is betting the store in streaming the latest stuff, they will (have?) cut themselves off at the knees.

Posted by Joanna | September 19, 2011 4:53 PM

@ Bob - well, that's what you get for burying your best link at the bottom of your post with an obtuse description. You think anyone still reading is interested in "Netflix as a consumer?"

Researching the "first sale doctrine" discussed in the link led me to the Betamax case. Basically Universal Studios and Disney sued Sony because Sony was making available technology that could be used to violate copyrights. Yes, the technology was Betamax "VTR" tapes. 5-4 Supreme Court decision.

Contrast that with the Digital Millenium Copyright Act. Fascinating stuff.

Posted by John | September 19, 2011 5:42 PM

I think Reed Hastings is intentionally trying to ruin the company so that he can leave with a 50-Gabillion dollar golden parachute.

Posted by John P. | September 19, 2011 9:39 PM

I find it highly ironic that the CEO of Netflix referred to AOL and Borders in his explanation of the Netflix split. Foreshadowing?

Posted by Granville Manganiello | September 20, 2011 7:19 PM

It's time for a new CEO and maybe some change s in the boardroom too. What they have done is irreversible damage to their brand when things were going so well for them. With the massive competition in the marketplace, and the huge loss in marketshare, and the damage to the brand, you are nuts if you are still holding on to this stock.

We have so many options as consumers and the marketplace has yet to decide any long term winners. Netflix simply invited new competition, showing they are not strong enough in management to win in the long run.

Posted by Mark Upshaw | September 21, 2011 5:56 PM