Netflix CEO's apology brings new backlash

Netflix CEO Reed Hastings tried yesterday to assuage customer wrath about the company's price hike, but instead ended up triggering a new round with news that its streaming-video and DVD-by-mail services will be almost completely separated.

Hastings on Sunday night offered an apology for the company's customer communications shortcomings, an attempt to justify the separation of the services, and some details about how customers who want both will now have two separate Web sites, movie queues, rating systems, search boxes, and payments.

The apology sounds genuine, and Hastings also is engaging with customers in the post's comments. But in the thread of 2,600-plus comments, there are plenty of people who appear neither mollified nor persuaded.

"You're not a DVD company and a streaming company: you're where I go to watch movies. That's it," said one commenter, Jeremiah Cohick. "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."

The attempt to rectify customer communications might have fared better had Hastings begun his commentary with a line he actually buried deep within the comments:

"By separating the services and charging for both ($7.99) we can license more streaming content," Hastings said. "We are hungry for better streaming service."

Perhaps the company didn't want to look more vulnerable than the departure of Starz streaming video content already makes it look. But it's pretty clear that Hollywood holds a lot of power over Netflix, especially with services from Hulu, Google, Apple, and others undermining Netflix' early-mover advantage.

So why not provide a frank acknowledgement that streaming video content isn't easy to come by and that the price hikes are a necessary to ensure customers get a good supply? Netflix could have been more persuasive while perhaps redirecting some customer dissatisfaction toward the content creators.

In July, Netflix announced a plan to split its DVD-by-mail service from its streaming-video service, charging $7.99 per month for each service instead of $10 for both. That didn't sit well with customers, with the company last week paring back its third-quarter subscriber estimate by 1 million and investors paring back the company's stock price by 19 percent.

Hastings clearly got the message. Taking the advice of communications experts, who'd criticized Netflix for failing to explain its moves, Hastings presented a justification that fits into a narrative of survival, not just one of greed:

For the past five years, my greatest fear at Netflix has been that we wouldn't make the leap from success in DVDs to success in streaming. Most companies that are great at something--like AOL dialup or Borders bookstores--do not become great at new things people want (streaming for us) because they are afraid to hurt their initial business. Eventually these companies realize their error of not focusing enough on the new thing, and then the company fights desperately and hopelessly to recover. Companies rarely die from moving too fast, and they frequently die from moving too slowly.

And he detailed how the company plans to set up its DVD-by-mail service under a totally separate brand, Qwikster, that will add videogame rental to the mix with games for the Nintendo Wii, Sony PS3, and Microsoft Xbox 360 consoles. Qwikster will be run by Andy Rendich, who has been involved in the DVD-by-mail service for 12 years, Hastings said. The Web site will launch in coming weeks, separated completely from Netflix operations, including movie selection, rating, and billing. It seems likely that Netflix's vaunted recommendation engine, which based on movie viewings and ratings, would similarly diverge.

Hastings apologized for communicating badly about the company's price increase, not for the price hikes themselves. That could trigger the sort of unsympathetic cynicism that can greet politicians who say "I'm sorry what I said offended you," rather than "I'm sorry for what I said."

What Hastings might have done better for winning over customers is to explain better why he thinks that separating the two businesses is a good idea and, more to the point, why raising prices is justified.

Regarding the business separation, Hastings offered a justification in terms geared for financial analysts and investors, not customers:

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.

More helpful would have been an explanation how the separation will directly improve services for a customer who might want to watch season 4 of The Wire over a week or two but on impulse watch a streaming video, too.

In the comments, Hastings offers a bit more detail. For example, responding to the complaint that people will have two separate queues of content to manage, he said, "We think the separate Web sites (a link away from each other) will enable us to improve both faster than if they were single Web sites."

The anger visible in the comments to Hastings' post shouldn't be ignored, but neither should they be taken as fully representative. The urge to lodge complaints can be strong, particularly with customers who feel as if a company has run roughshod over them and didn't listen earlier. Hastings is a very visible target for their wrath now.

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But not everybody was mad. "I am a busy teacher that looks forward to watching a Netflix movie on the weekends. I don't do streaming so I am satisfied with the lower fee. In the scheme of things that can go wrong in life, this is just not an issue," read a comment from Kathy Gates.

Evidently Netflix is counting on that sort of split in the customer base in the long run--the legacy DVD rental customers and the new-age streaming video business enabled by Netflix. Perhaps Hastings believes that the businesses are separate enough that the one he clearly views as doomed in the long run, DVDs by mail, can be spun off to a willing buyer.

The only problem is that today, the businesses are linked, in at least many customers' minds. DVDs offered a better selection, while streaming video offered better convenience. Now, instead of one service with two facets that compensated for each other's weaknesses, there are two services that each looks half-baked.