I got a letter from Reed Hastings, Co-Founder and CEO of Netflix,
today. It was an abbreviated form of what is here: http://blog.netflix.com/2011/09/explanation-and-some-reflections.html So, even though I don’t have his real email address I replied. I cancelled my membership months ago. I thought about pulling apart each argument, but I’m tired of writing today, so I thought I’d just sum up my feelings about where Netflix went wrong.
I followed what was happening with [Netflix’s renegotiated] licensing deals a few months back. I feel that you made a critical error then in multiple facets, and you are making another error now.
First off, let’s look at what happened then: As I understand it, the content providers wanted higher revenue from their product and also felt that Netflix’s combination of streaming and DVD under one low price devalued their products, and would lead to cutting prices on all form of delivery of their products. Essentially, they wanted to find a way to make your company raise prices, so they could then turn around and renegotiate their terms with other content delivery services when those contracts were up. Since your service depends on successful negotiation, Netflix was held over a barrel. So, I understand why you did what you did. I am not privy to the facts and what arguments and tactics the studios used in negotiations. So, I can’t give any feedback on how you could have countered them (or even if you could have). However, I’m left with a distinct impression that you did not make a few points that would have told the studios that the bottom line would mean the studios making less money for their content.
But when Netflix turned around and neglected to mention that you were essentially forced to either raise prices or cut services due to less than favorable terms for content license renewal, I see that as a critical error. Had you communicated that you [weren’t making a “cash grab”, Netflix] probably would have actually gained sympathy from you subscribers, and lost a lot less of them. You might have been able to keep the company intact.
Now, you make another error: by dividing the services into two distinct entities, you are making people do more work for the same result. In case you have forgotten, Netflix was targeted at people too busy, lazy or otherwise could not go to video stores to rent videos and then return them. So, basically you offered convenience as part of your service which appealed to people that wanted to spend less time deciding what to watch. When you split the services, you’re going to force people to have separate queues and probably different interfaces to learn on top of that. This will lead to a lot of extra effort as a person has to first check Netflix for content and failing to get it there, they’ll have to open another tab, sign into Qwikster, type the same query and then see if they can get the video they are looking for. Sure it’s not that difficult to do, but then you consider the following scenario: people might not realize that content available on Qwikster is also available on Netflix. When they find out that they used a queue slot on something they could have gotten right away, they are going to be upset.
That’s not even touching the price issue, which could have been dealt with by more open communication listed above.
With so many error made, I question Netflix’s ability to innovate and survive the transition considering the company mishandled their relationships with both the studios and customers.