Tuesday, September 20, 2011

Netflix: suicide by stupidity

Once upon a time, Netflix was touted as a case study in the emerging world of dot-com startups.

Now it's an object lesson.

In case you've missed the drama, Netflix, not satisfied with pissing off its customer base by splitting its DVD-by-mail and streaming subscription services (net result: nearly doubling the cost for both services), continues its campaign by announcing the two services will be split into two distinct companies, with separate billing and customer accounts. If you were a Netflix customer and hadn't dropped one or the other service in the wake of the price boost, this will likely do the trick.

For those of you out there who were never customers, here's a little background. Netflix launched its original DVD-by-mail service in 1997 using a traditional $4 per rental model. By 1999, they'd moved to a subscription service that featured unlimited rentals without due dates or shipping fees (the different tiers of service revolved around how many disk at a time you could receive). Part of being a subscriber was building the queues of discs you wanted to see, and rating the discs you'd already seen.

Initially, streaming ("Watch Instantly") was thrown in for free. The available titles were but a small subset of the collection. We had the absolute cheapest level of service for a while - $5 a month - which included just 2 rentals a month and a fixed number of hours of streaming (I forget how many - few enough there was bitching in the household).

Fast forward to recent times.

After dropping the cheapest plans and jacking up the cost of the rest of the DVD-by-mail plans (all of which still included unlimited streaming), in July, Netflix announced (*TADA*) they were splitting streaming and by-mail plans. The cheapest plan (which we were on) was $9.99 a month before the split. After the spilt, it was $7.99 for DVDs and $6.99 for streaming, which meant the cost of the full service had jumped from $10 to $16 a month.

The video watching world howled its disapproval.

Subscriber numbers dropped by 4% (around 600,000 household), and their stock price fell by 45%.

Now, not content to merely shoot themselves in the foot, they've shot the other foot by announcing they are going to completely split the streaming and by-mail operations into two separate companies. Co-Founder and CEO Reed Hastings rolled out this news in an email to subscribers and a blog post entitled "An Explanation and Some Reflections," which starts out,

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.

Uh, Reed - you don't know the half of it. And this was before you announced your plans to split the companies. For some truly scorching feedback, scroll to the comments at the end of his article.

This whole thing is not without its share of rich ironies. Because they've decided the "Netflix" name will be retained for the streaming business, the old DVD business will be rebranded as "Qwikster." Unfortunately for the whole Social Media thing, the Twitter handle "Qwikster" is already occupied (sample Tweet: "Ima about mad as shyt I hit my head wit this wrench at my bros House haha n instead of being concerned he laughs :I wat a bro").

Whoops!

Perhaps a more ominously looming shadow is the fact that broadband ISPs have been moving to cap the bandwidth of formerly unlimited bandwidth accounts (I'm talking about you, AT&T). Streaming video is only attractive when there's no meter on internet service.

One can only assume this great divide was done with an eye to selling the DVD part of the business as quickly as possible. Why else tear a recognized brand name off of a venture that's going to need all the help it can get? I'd be willing to bet someone down the line is going to pick up this piece of the business for a song, but it may not be the next owner.

Before making these last couple of changes, Reed Hastings might have found it instructive to review the case study of the fiasco known as New Coke. He's about to replace it in business textbooks.


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