Monday, September 19, 2011

CEO Reed Hastings announces Netflix will split into two companies; now it will be both more expensive and more complicated; customers continue to move on

The CEO of Netflix, Reed Hastings, issued a mea culpa via email last night, then informed the company's customers that while he may be sorry for raising prices on their services he wasn't done messing with the business model – Netflix will now split off its DVD rental business from its streaming movies business creating a new company to be called Qwikster.

"In hindsight, I slid into arrogance based upon past success," Hastings wrote to customers. "We have done very well for a long time by steadily improving our service, without doing much CEO communication. Inside Netflix I say, “Actions speak louder than words,” and we should just keep improving our service."

Unfortunately, his next paragraph starts with the word "But", and anybody who is married or in a relationship can tell you that you never say you're sorry and then follow that up with "But".

"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."

So there it is, Netflix has raised your prices and now we will start sending your two bills instead of one. Don't you just love us?

The letter is also posted on the company's blog page and what follows it is over 2,700 comments telling him what any business major could have for free: you are nuts.

"Seriously, you thought a good idea to make up for miscommunications was to separate the websites and make it more complicated for us to manages our queues? Really?" wrote the first commenter.

"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," wrote another to a chorus of "amens".

"If a film I search for on Netflix is not available for streaming, will the website still tell me if the DVD is available?" one customer asks. "Or must I search twice?" Hastings responds to this one with "Ouch. You'd have to search the second place if we didn't have it in the first place," showing that once again the company has not thought this through.

It is sad to see a pioneering company like Netflix do this to themselves. But maybe Netflix will be remembered as fondly as Osborne Computer which now is known as much for The Osborne Effect, a business study in what-not-to-do. Maybe in years to come business majors will be studying The Netflix Effect, as well.