After two months that saw a torrent of angry, fleeing customers and the first bad PR of its corporate life, Netflix has announced that it is spinning off its core DVD rental by mail service under the bizarre name Qwikster.
The company’s online streaming business will retain the name Netflix, each company will have its own management structure, and both entities will be owned by parent company Netflix, Inc. The new Qwickster will feature rentals of console video games in addition to Blu-Ray discs and DVDs.
The company’s problems began in July, when it announced that it was jacking up the price for accounts that featured both streaming and mail movie rentals, pushing customers toward more reasonably priced accounts based on only one method of delivery. Customers complained loudly on the internet, which is not unusual any time a company makes a change.
What was unusual is that the internet braying was actually indicative of larger unrest among the company’s customers. They began to actually lose customers over the price move as well as the loss of streaming content from Starz and their strange agreement with the mafia-like movie industry to delay availability of movie rentals until 30 days after a DVD is released.
Worse than the actual changes Netflix made to its subscription offerings was the company’s reaction to the backlash; almost literally “screw you, we’re doing what’s best for us.” That’s fine for a business to do, but suicide for a business to say.
“We realized that streaming and DVD by mail are becoming two quite different businesses,” [Netflix CEO Reed] Hastings writes, “with very different cost structures, different benefits that need to be marketed differently, and we need to let each grow and operate independently.”
Hastings also apologized to customers for Netflix’s lack of clear communication with its customers regarding the split. “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,” Hasting writes. “I messed up.”
Investors are worried about Netflix’s future, too. The company’s stock finished the week as the worst performer in the S&P 500, down almost 24% from the previous week’s close.
The move will destroy the business, creating an opening for competitors like VuDu and CinemaNow, because it is company focused, not customer focused.
The price and plan changes that flustered many [customers] months ago remain in place, but the company now directs them to two web sites with two search indexes, two completely separate sets of recommendations, two entries on their credit card statements, and so forth.
Netflix’s moves in the past few months show an amazing lack of interest in how what they do effects their customers. Customers notice things like that. I was a Netflix customer in 1999, when you paid for each movie you rented. They made out because most local video stores weren’t stocking DVDs at the time, and those that did had only a scant few. When that began to change and you could find DVDs locally, Netflix made a brilliant move that took them from a niche service into the mainstream: Offering “unlimited” monthly subscription plans. It was exactly what the market wanted at that time.
Netflix has forgotten about how it found its original success by offering what the market wanted, and this will be their downfall.