It would be easy to ridicule Netflix at this point. In fact, I already have — on Twitter — where I compared Netflix’s CEO to Chandler on Friends, digging a deeper hole each time he tries to “explain” himself out of an awkward situation. It’s been disheartening to watch what had been one of my favorite services and most admired corporations slowly sink below water. There’s now a real danger that the Netflix ship may be unable to recover. And yet…I also understand that Netflix is facing a difficult dilemma with no clear sure-fire solutions.
The first shoe
Last July, Netflix sent an email to all of its customers, announcing that it was splitting its DVD and unlimited streaming services into two separate plans “to better reflect the costs of each…(thereby giving) our members a choice.” [A longer version of the email message was posted to Netflix’s blog.]
The announcement was a public relations disaster — with good reason. Worded to sound as if Netflix was giving its customers some new advantage, the change actually amounted to a huge price increase. If you currently subscribed to the one-DVD-at-a-time plan, your rate for the exact same service would almost double. Rather than spell out these implications, explain why they were necessary, and offer empathy for the likely negative reaction from their customers — Netflix simply said, in effect, “like it or leave it.” Many customers began to choose the latter option.
I remained on the fence. I don’t like a price increase any more than the next guy, but I still liked what Netflix provided — and was willing to pay more to get it. Until now…
The other shoe drops
Over the past weekend, Netflix again sent out an email to all of its customers. This one was personally signed by CEO Reed Hastings. [Again, a longer version of the email is available on the Netflix blog.]
In it, referring to the prior announcement, Mr. Hastings admits:
“I messed up. I owe everyone an explanation. 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. In hindsight, I slid into arrogance based upon past success.”
The price increases stand unchanged. It’s just that Mr. Hastings is now sorry about how they were announced.
Personally, I found this to be too little, too late — and likely insincere. Actually, I see no excuse for the first message ever being sent. I don’t send a “sensitive” email to a close friend without re-reading it numerous times and letting it sit for a day or two. I’ll also have my wife check it over to get her reaction. Only after it is thoroughly “vetted,” will I send the message.
Mr. Hastings was sending an email to millions of subscribers and has an entire paid staff to offer advice. How could they not foresee the reaction that would result? How could they have ever approved the email? That the email was sent means that the process is so screwed up that either Mr. Hastings should resign as incompetent or he should fire whoever was responsible for the debacle (maybe this has already happened; I don’t know).
But, with Netflix’s latest missive, Mr. Hastings had more than just an apology on his agenda. The email went on to explain how Netflix would soon be completely separating their DVD and streaming services. The new name for the DVD service will be Qwikster. The streaming service will retain the Netflix moniker. On the plus side, this will supposedly allow each service to focus on its particular needs, so as to grow and improve independently. However, the split comes with numerous minuses, as even Mr. Hastings admits:
“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.”
It’s even worse than that. Currently, my DVD queue shows if a listed movie is also available for streaming. I have used this feature on numerous occasions to save myself from selecting a DVD that I could watch over streaming instead. Similarly, when I search for a movie, the results shows me the availability for both Instant and DVD at the same time. All of this will be gone after the split.
The worst part of this — from a business perspective — is that the “unbundling” eliminates most of the incentives for a customer to stick with Qwikster. Until now, if I gave up on Netflix DVD rentals, I would also lose all of the just-cited advantages of a linkage between Netflix’s DVD and streaming services. With that linkage gone, Qwikster is now on its own to compete with everything from Redbox to iTunes rentals. As my frequency of DVD viewing declines, the advantages of Qwikster fade even more.
As a result, I will be canceling my Qwikster DVD subscription, a casualty of the changes at Netflix.
What about the Netflix streaming service? I plan to keep it for now. It’s convenient — especially with its queue accessible from almost every television and television peripheral that you can buy today — as well as from Macs and iPads. But the recent announcement of the impending disappearance of Starz from Netflix is incredibly bad timing. Just as Netflix seeks to have its streaming service survive on its own, the customer value of the service significantly declines. Netflix has bet the farm on the growth of its streaming business. Unless Netflix can deliver a strong library of streamed movies, the company may lose that bet.
With its price increase announcement, Netflix precipitated a self-made public relations disaster. It then compounded the mess by announcing a company split that succeeds in making its services less convenient and less competitive. Not good.
And yet…Netflix had to do something like this. Standing still was not an option. Here’s why:
DVDs are dead. Yes, I am exaggerating — but only in the short run. While DVDs (and Blu-ray discs) are still with us, their prevalence is on the decline. Just as DVDs eventually eradicated VHS tapes, online delivery of video will eventually replace optical discs. DVDs may still hang around (along with CDs) — but with a much diminished market share. Apple already knows this: Rather than add Blu-ray drives to their machines, they eliminated optical drives altogether — and instead doubled down on iCloud. I believe Apple’s assessment is on target here.
As a result, Netflix cannot afford to have a business model that depends primarily on DVD mailings. Netflix correctly sees its streaming business as its future. Separating streaming from DVD subscriptions is just the first step. Ultimately, Qwikster will close up shop — which may be why Netflix is not too concerned about the negative consequences of the Netflix-Qwikster split. When the time arrives for Qwikster to fade away, Netflix will be better off with streaming as a separate entity. Keeping its streaming business intertwined with its DVD business risks wrecking both businesses.
Netflix also needed to start charging for streaming movies. Unlimited streaming began as a free bonus. If you paid for the Netflix DVD service, you got streaming thrown in at no added cost. This is not sustainable — especially as the streaming library grows and the service becomes more popular.
As a fantasy exercise, imagine that a day comes when every movie is available via streaming. In such a world, a DVD subscription makes no sense. Although I could concoct a few situations where DVDs might still be preferable, they would be too rare for the business to survive. If Netflix was still giving away streaming at this point, the company would soon cease to exist. This fantasy scenario will be reality some day. To avoid disaster, the free ride for streaming had to end.
So yes, changes are necessary for Netflix. But it’s all in the timing and the manner in which the changes are made. Netflix has to handle the short term transition well enough for the company to survive to reap the long term benefits. So far, things have not been going well. Case in point: the company’s stock has lost around 2/3 of its value since peaking a few months ago.
I believe things would have gone better if Netflix had started with a smaller price increase, charging say only $3.99/month for streaming (at least for those also maintaining the DVD service). Over time, as the streaming library grows and the service becomes more entrenched, a second increase could be announced. What they did instead was too much too soon. Together with how they handled the announcement, it mainly served to alienate customers rather than bring them on board.
Second, while a split into Netflix and Qwikster makes sense, I would not have been so quick to completely isolate their user interfaces. Netflix should provide an optional means of integrating features such as user ratings and film availability. There needs to be a greater incentive to stay with both services. As it stands now, I see huge defections from Qwikster coming — defections that could have been avoided.
But that’s just me doing some armchair quarterbacking.
Even if I’m wrong in my advice, even if Netflix handled everything in the best possible way, their future would be on shaky ground. Such is the way the future can quickly discard outmoded or lagging technology businesses. Netflix has not handled things in the best possible way. Whether or not they can survive their recent missteps remains to be seen.