Netflix has made a big mistake and it’s not only in pricing

I want to preface this with the fact that I was a late comer to Netflix but thanks to my stepdaughter Jessica I’ve used and loved it for three years now. Given that I watch a lot of movies, both on DVD from Netflix and streaming from them through an AppleTV their recent price increase, which was significant, did not drive me away or even give me much pause.

This post from Reed Hastings, the CEO of Netflix, explaining the price increase: An Explanation and Some Reflections is what gives me pause. It’s a poorly written, convoluted explanation of a bad idea. Read the comments, they’re telling.

Here’s their video apology:

He makes no apologies for the price increase, just for not letting us know why Netflix has done it. The reason they did it is because they are separating their two businesses: DVD rental and streaming. The DVD rental business will be renamed Qwikster and the current web site will be rebranded with this name and a new logo and will sit at a new domain. It will have its own separate charge on your credit card.

While I agree that the future of Netflix is streaming movies over the internet this is the most awkward way to handle the transition I can imagine.

For a company that’s done well, it’s obvious to me that Reed Hastings and Netflix have no clue how their loyal customers are hurt by this and it’s not just the price increase, it’s the separation of the services into two web sites.

For me the appeal of Netflix is their web site where I can search for a movie, decide how I want to watch it (DVD or streaming if its available on both) and then, rate it when I’ve watched it. One web site, one search, decide on platform if possible, then one rating. And, the rating system helps fine tune the Netflix recommendation engine which has worked amazingly well for me, pointing me to movies I’d never heard of or considered before. I enjoy poking around the Netflix site rating and re-rating movies. The separation of the two services will mean I’ll have to do it twice.

At this point very little of the content I like to watch on Netflix is available through streaming so much of my business comes through DVD rental. Unless they’ve got much of their collection digitized and will be announcing it soon, I’d drop Netflix (streaming) before I dropped Qwikster (DVD rental).

It may be that the problems with the US Post Office will lead to enough of a price increase for mailing DVDs that the business model Netflix was founded on won’t work anymore. Anyone who’s thought about this for more than a minute understands that at some point in the future Netflix won’t be shipping out DVDs anymore but that transition from, as Nicholas Negroponte put it “atoms to bits” is as much about marketing and keeping “old skool” customers happy and in the fold as it is about an internal business model change that none of us customers were told about.

The mistake is the way they’re doing this, not the price increase on the service. This stumble may put them out of business.

15 thoughts on “Netflix has made a big mistake and it’s not only in pricing

  1. Richard Post author

    Here’s an editorial by Darren Murph at Endgadget:

    http://www.engadget.com/2011/09/19/editorial-reed-hastings-netflix-spinoff-isnt-about-dvd-succes/

    While I agree with him that DVD rental is a dying business, unless Netflix is going to release much of their DVD library in streamable form in the very near future, their streaming library isn’t great. The single web site and a very long tail (deep content) is what makes the current Netflix worthwhile.

    Maybe I’m an unusual customer but I do not think their current library of streamable content is great. Their DVD library is great. Tell us you’ll move the DVD library to the instant library over the next year and that will make us happy.

  2. edward

    your right Richard bad idea to separate the two. anyways i think apple should buy them along with Tivo and then they should come out with an amazing tv.

    change that industry like they changed the music industry.

  3. Gary

    Richard, you’re so right on all the excellent points you made about what Netflix offers, and the ease of use for both customers at its central site of business, Netflix. When I read Reed Hastings email this morning, it blew my mind. It wasn’t at all that the refused to be more precise in justifying the price increase, but that he sophomorically laid the blame on poor communication. Splitting Netflix into two websites to provide its services makes absolutely no sense to me at all. While its not the end of the world, it seems unnecessary, and more complicated for customers. Why not retain the same website and all its functions and simply try to improve upon the streaming from there. And the name change for the DVD service is bizarre, what a dumb name.

  4. Richard Post author

    Edward and Gary: Thanks for the feedback, I was so annoyed by the email from Reed Hastings this morning I had to post something.

    Maybe we’re just missing something here but it’s like Yahoo being clueless about how valuable an asset flickr is/was and letting it wither on the vine. Netflix doesn’t seem to have a clue how important consistency of brand is and the fact that one of the things that makes them successful is an easy to use web site that makes browsing fun and fast.

    Any change that gets in the way of that is bound to do harm, not good.

    I understand why they need to downshift the DVD business but they don’t have enough streaming content up yet to do this now. Unless they’re going to be releasing a shitload of content on their streaming site that’s not there now, I can’t see this working for them, at least for me.

    Now I’m going to be investigating more Apple content on my AppleTV. I’ve never even used that portion of the menu system let alone rented anything. Netflix just loosened their grip on me and may lose me all together if Apple or maybe Amazon steps in.

    And, Edward, given that we’re Amazon prime customers and get their streaming for free, this is a great opportunity for Amazon to eat some of Netflix’ market share by getting their content on AppleTV’s menu.

    I hope they do it.

  5. Andrew

    Agreed. This seems like a very bad move. Who was the “consultant” who recommended this? Two different business “models” (or rather, li9nes of business), sure, but two different companies? OK, and Coke should separate Coke and Diet Coke into two separate companies too.

  6. Richard Post author

    Pat: Not sure what you think is BS, my comments or Netflix’ move.

    Andrew: They’ll be the same company, two different services. Still, the thing that makes Netflix great (for me, maybe not Pat) is a single, searchable database and rating system. The fact that these will be two different web sites that won’t communicate seems to be tossing out the accrued user experience and time spent rating movies.

  7. Richard Post author

    More on this over at Huffpost:

    Netflix Announces Qwikster, A DVD Service That Should Die Qwikly

    http://www.huffingtonpost.com/2011/09/19/netflix-announces-qwikster_n_969483.html

    The comment stream is telling, this one’s quite good:

    “Listen carefully – “I DO NOT WANT TWO SERVICES”. You have taken an inexpensiv­e, successful and convenient service and made it inconconve­nient, expensive and therefore unsuccessf­ul. Hastings is an idiot and should be shown the door by the stockholde­rs. Do they realize you’re doing this during a recession don’t you?”

  8. Richard Post author

    More on this from Dan Frommer (via Gruber):

    http://www.splatf.com/2011/09/netflix-qwikster-facts/

    Everything Dan says makes sense, except for the fact that the DVD library is huge while the streaming library is tiny.

    If they were equal it would be a no brainer, they are not.

    If Reed said in his video that he plans to digitize most of the DVD library in the next year I’d be happy and would quiet down about this. In fact, there is no mention of how fast the streaming library will grow in his video or email.

  9. edward

    yes it is an opportunity for amazon to move their content to apple tv. hope they do it but not sure they will because they do not want to give an upper hand to apple.

    I wander if the split has something to do with studio agreements. personally i think that the studio are the ones holding this back…

  10. Richard Post author

    Edward: Studios, the US Postal Service, no doubt many other things.

    But, the way Hastings has handled it is really bad: poor communication, and the price increase should have happened AFTER the two divisions were separate and up and running. They’ll pay dearly for this.

  11. edward

    oh I think they already have lost a million customers. and the stock was cut in half ( 52 week range 129.37 – 304.79) and today we are closer to the bottom then the top. I would not want to be the ceo of that company….

  12. Richard Post author

    Edward: I really hope they can survive it. While it’s sort of fun to pile on Reed Hastings for a bad decision, if they stayed just as they are right now I’d be quite happy. They won’t but we can dream…

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