Netflix: What Not To Do

One day the story of Netflix and the summer of 2011 will be told in an HBS case study, and the students who are required to study it will respond with a resounding and collective…wtf?

Here’s the very condensed version of how that case study will read:

In July, Netflix announces they are scrapping their “unlimited streaming plus one DVD at a time plan” and instead separating their streaming and DVD plans into two different offerings, thereby increasing by at least 60% the monthly cost for those who want a blended package.  Turns out Netflix didn’t anticipate that much as they wanted to exit the DVD business, an awful lot of people still want DVDs – if they’re anything like my parents, the word streaming sounds complicated and scary, and if they’re anything like me, they love the immediacy of streaming but also desire access to the vastly deeper catalog DVDs offer – and the economics of their business were no longer working.  (Seems they could have avoided that little bit of unpleasantness with some research, but since HBS case studies don’t editorialize – that’s the student’s job – I digress.) Not surprisingly, the announcement was followed by a very loud customer response, and they were PISSED.

Fast forward to September.  The company announces its US subscriber figures, which had grown from 6 million in 2007 (when they introduced streaming) to 24.6 million as of June 30, were going to drop by 600,000 over the 3rd quarter ended September 30 rather than increase by 1 million.  Ouch.

Netflix’s stock gets hammered (actually, it has been since the original announcement in July).  Then comes the long overdue mea culpa of sorts.  Reed Hastings, the company’s CEO, explains on the company’s blog why they did what they did and apologizes for the way it was handled.  He also announces that they are going to organize their two separate product offerings into two separate businesses – Qwikster for DVDs by mail, and Netflix for streaming – with separate websites, separate credit card info, separate cataloging of your likes/dislikes and recommendations, etc.

Now for my take.  His explanation makes good sense, and I applaud him for taking the step, even if it is two months late.  You don’t have to look far – AOL, Yahoo!, MySpace – to see how quickly a once high flier can become irrelevant.  But if you’re going to apologize, apologize.  That half-assed, “I’m-sorry-if-what-I-did-hurt-you” bullshit is no apology at all.  And two separate companies with two separate ways for customers to engage?  You just pissed off your subscribers and tried to make nice – now you’re going to make it harder for them do business with you?  As for the name – Qwikster – it sounds an awful lot like Quixstar, which is the name Amway used for a short time before they recently went back to using Amway (full disclosure:  Quixstar/Amway is a former client of mine).  Any idea how many millions of customers and employees Quixstar/Amway have?  And finally, to add insult to injury, nobody, it seems, bothered to check as to whether the Twitter handle @Qwikster was available before making today’s announcement.  Turns out (a) it is already in use by someone whose tweets make liberal use of very colorful language, and (b) misspelled versions, like @quixster, were available, but once the announcement was made, people jumped on ’em.

For a company that has done so many things so right for so long, they were bound to make a misstep – everyone does at some point.  But this was botched in a big way.  People don’t like their cherished brands that they have loyally supported to turn on them, and that’s what this price increase/two separate offerings has felt like from the beginning.  And with Wal-Mart-backed Vudu gaining steam (and having a much better streaming library IMO), there is a strong competitor in the wings.  I hardly think the mistakes are fatal; the recovery process will nonetheless be interesting to watch.