It’s the movies, stupid

Not having a masters — or anything else — in business, it’s hard for me to see the wisdom of the announcement that Netflix is separating itself into two companies — one that will mail you DVDs, and one that will sell you streaming video. Still, one easily gets the feeling we’re watching how a CEO can take a company and drive it into the ground.

Reed Hastings, the co-founder of Netflix, must’ve had that feeling too, because his announcement that Qwikster will now handle DVD mailing as a separate company started this way…

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. That was certainly not our intent, and I offer my sincere apology. I’ll try to explain how this happened.

Over the summer, Hastings had announced a huge price increase for Netflix (the DVD Netflix, I mean, Qwikster. Or whatever), which caused people to drop the DVD portion and stay with streaming, a service that has a much smaller film library. The stock plunged.

In his apology today, Hastings announced his company’s — companies — new direction:

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”.

We chose the name Qwikster because it refers to quick delivery. We will keep the name “Netflix” for streaming.

Qwikster will be the same website and DVD service that everyone is used to. It is just a new name, and DVD members will go to to access their DVD queues and choose movies. One improvement we will make at launch is to add a video games upgrade option, similar to our upgrade option for Blu-ray, for those who want to rent Wii, PS3 and Xbox 360 games. Members have been asking for video games for many years, and now that DVD by mail has its own team, we are finally getting it done. Other improvements will follow. Another advantage of separate websites is simplicity for our members. Each website will be focused on just one thing (DVDs or streaming) and will be even easier to use. A negative of the renaming and separation is that the and websites will not be integrated. So if you subscribe to both services, and if you need to change your credit card or email address, you would need to do it in two places. Similarly, if you rate or review a movie on Qwikster, it doesn’t show up on Netflix, and vice-versa.

Got that? In order to serve customers better, and to ensure that Netflix won’t go the way of AOL and Border’s, Netflix is going to make the process of patronizing it — them — ridiculously complex.

Give Hastings credit. On his blog, he’s “mixing it up” with his customers who seem to universally hate his idea.

This comment from a customer in San Francisco, for example, seems ideally suited as the basis for a full semester class at Wharton:

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. The future clearly is streaming, but by separating and charging more for access, you’re wildly less valuable to me. I’ll likely cancel. You haven’t listened to customer feedback. You’re delusional and you’re lost.

And Ben Thompson of Maple Grove points out — accurately — that separating the companies makes it much more difficult for the people who want the advantages of each.

If queues aren’t integrated it’s huge detriment for customers who subscribe to both services. We need to see which titles on qwiskter are available on netflix in order to use both effectively.

Hastings’ response? Basically, “you’re on your own.”

“ouch. You’d have to search the second place if we didn’t have it in the first place.”

Somehow, this all made sense at a meeting of Netflix execs.

Then, again, maybe they didn’t have a choice but to toss a Hail Mary. Check out the stock price since summer (click image for big view):


In the last quarter, Netflix lost 1 million customers. It keeps making mistakes. In the last few months it botched the price increase, it let Starz (which provided much of the content) walk away, and it prevented households from streaming on more than one device at a time.

The company is providing a great test case: Is the content provider more powerful than the consumer? In this case, consider Netflix the consumer, and Hollywood as the content provider. It’s a fine example of the “you’ll take what we give you; good luck finding it somewhere else” economics.

The stock is significantly higher today on a day when the rest of the market is tanking.