In another wave of consumer groan Netflix, the provider of on-demand streaming media and DVD service, announced yesterday that it was going to separate its two services into independent companies. Netflix will continue to provide on-demand streaming of media (movies, shows, documentaries, etc.) but the DVD service will now come from the offshoot company, Qwikster.
One would have thought that Netflix, after reading the hundreds of negative tweets and seeing its stock price take a dive, would have taken much better care of its announcements moving forward so as to avoid the same consumer backlash. But alas, this was not the case.
Here’s what happened: Netflix customers, like me, checked their inbox yesterday to find a rather bizarre message from Netflix Co-Founder and CEO Reed Hastings. The letter initially attempts to explain the price hike from the summer and soften the blow of this new announcement by taking a rather inappropriately familiar tone to say “I messed up. I owe everyone an explanation.” But instead of offering an explanation, all the letter does is raise more questions.
Instead of a heartfelt apology, the letter comes to resemble an informal notice, announcing that a radical change and split is to take effect- Netflix will keep its online streaming but export its DVD service to create Qwikster. Aside from this change, the letter is riddled with promises of “improvements” to both services without telling its customers the true nature of the transition.
The explanation given for the price hike and separation of billing for the DVD versus the streaming components is that Netflix needed to first separate internally as a step towards creating Qwikster. The argument here is that having two separate companies, focusing on different aspects of consumer media enjoyment, will better both services because each company will focus on that niche service. And granted, the two services have different business models (the way Netflix is able to license the content for DVDs is much simpler than for streaming content) so it is conceivable that this was a genuine reason for the split. However, this announcement was delivered to the public with all the finesse of a walrus on ice skates.
Netflix has proven, yet again, the importance of a PR strategy to minimize damage when engaging with your customers. But enough of what was in the letter. What drew my attention was that Netflix seems to be going against the tide of technology as it creates Qwikster.
I can barely remember the last time I watched a DVD let alone actually bought or rented one. And yes, I am biased on this count because I am a streaming-only Netflix customer. Still, it puzzles me that as technology moves more towards integration, Netflix would chose to segregate its two services. More and more users are opting in for the online streaming capabilities because it can be viewed anywhere with a decent internet connection, and can be synced up with different consoles like the PS3. DVD’s are fated to meet up with the VHS tapes of old in the electronic afterlife as more and more technologies move into the cloud and content is made accessible from many different devices (an increase in tablet and iPad sales will tell you that.)
The real question for me in this announcement was, how will streaming get better? If Netflix wants to keep both its companies thriving, then it would only stand to reason that it will not update its online library with as much vigor so as to out-compete Qwikster, thereby forcing its customers to buy into its sister company for DVD rentals. And quite honestly this is the business model it has pursued since it launched online streaming, leaving very popular titles only for DVD orders. If, like Reed promises, the services get better won’t they just compete against each other till only one is left? In this case, my bet would be on online streaming as it is far more accessible and much more in-tune with the trend in technology and consumer culture. Conversely, if Netflix is to maintain both companies as viable business, then it cannot make them competitive against each other. Titles that are accessible on DVD will not be available for streaming (the current Netflix reality.) If this is to be the case, then why the split? Perhaps it was a way to limit consumer outcry- by diverging into two “unrelated” companies, price increases, etc. can be made on the different services at different times so only one company will suffer the brunt of the uproar, and in a much diminished way. The only other scenario I can think of is that Netflix is in a lot more trouble than it would have us believe. Ever since Showtime didn’t renew its contract with Netflix, there have been some wonderings as to how Netflix would be able to move on. This simply might be a way for Netflix to salvage its DVD service and leave it untarnished as the Netflix library becomes more and more outdated.
Well, regardless of the reason for the split, the way in which this announcement was delivered has caused quite a stir in its consumer base as pledges to leave Netflix for other services like Hulu Plus crowd the online forums. And to add insult to injury, Netflix stocks take another dive in the market. Reed’s letter has only served to further the uncertainty of Netflix’s future. If you ask me, there’s still a lot of explaining to do and if Netflix doesn’t do something to rebuild trust with its abused customers soon, it might just lose them.