So many things struck me as wrong about the latest Netflix communication in which CEO Reed Hastings apologized and then announced the DVD business will be spun off into a separate brand,
Creating a new brand: Brands are powerful. They mean something. They are difficult and expensive to build. Netflix has a great brand. Why start from almost scratch for a DVD business? A new brand won’t have the warm, fuzzy feelings the name Netflix currently brings. Can you imagine Pizza Hut spinning off its delivery business under a new brand? Fed Ex renaming its Ground service? Charlie Sheen renaming his multiple personalities (call the nice one on the Emmys last night “Charles”)? I see businesses all the time think they can create products under new brands without understanding the work and expense it takes to get the kind of recognition Netflix has now. Netflix probably does understand, but it would seem to be making things unnecessarily difficult.
Spinning off the DVD business: Based on my use of the service, Netflix is taking the wrong view of their product. Netflix is looking at itself as having two products, disc rentals and streaming video. I view Netflix as one entertainment product with complementary delivery methods. Disc rentals and streaming video each have strengths that make up for the other’s weaknesses. Discs offer greater choice of titles. Streaming video offers instant gratification and mobility. Completely separating these means Netflix is just like any other Over the Top streaming media company, including many that have come and gone over the years. Up to now, the recent split of services still allowed easy migration between the two. Also, if discs are a dying medium, is Qwikster created with the expectation of shrinking? New brands are usually created to grow, not act as a technological hospice.
Limiting the product offerings: Barring major new feature announcements, this makes the Netflix streaming business a one-trick pony. A laser-like focus on a single business can be good, but competitors such as HBO seem to be finding success from offering multiple delivery methods (cable, video on demand, discs and HBO GO streaming), so why would Netflix want to put themselves at a disadvantage? (Note: I’m dropping my Netflix streaming and keeping the disc plan because I’m already paying for services like HBO and Amazon Prime that provide streaming video at no extra cost.)
Removing the DVD gateway to streaming: Disc rentals are a gateway drug to streaming. I believe many customers who might not be familiar with connecting devices to TVs for streaming movies might sign up for DVD rentals first and then ease into the Watch Instantly service. This separation creates a higher hurdle to entice consumers to jump. Netflix now loses the support of hooking people on discs and moving them up the digital product chain.
Inconvenience for customers: I took a survey at my bathroom sink this morning and 100% of the wives present agreed this split is not good. My wife also handles all the family accounting and I know she would not want yet another bill to track every month.
Ratings: One of the great features of Netflix is its recommendation engine. It relies in part on your ratings of movies. Separating these services means movies you rate in the disc service won’t be rated in the streaming service. Netflix will no longer use a combined view of your entertainment choices and each service will have less user data.
Increased costs: I think it’s reasonable to expect increased advertising and staffing costs with this split. A new brand will need marketing to support it. There will be new executive positions. Separate billing means additional billing operations and extra credit card processing fees someone has to pay.
The name Qwikster: It sounds like a quick lube oil change place or a convenience store. Not only did Netflix choose a new name for the DVD service, it chose one hard to spell. You have to see the name before you know how to spell it. Even the New York Post got it wrong – their online article this morning spelled it “Quickster” in the headline and “Qwikster” in the body. But the owners of quickster.com, qwickster.com and qwuickster.com just won the domain parking lottery.
Potentially making data less transparent: Now that consumers will have separate accounts, that may make it harder to judge Netflix’s market penetration. We may not know how many consumers subscribe to both the disc and streaming businesses. You may know their total customers are 25 million across both services, but not whether that represents reach to 25 million or 12.5 households unless Netflix reports combined data across both brands.
Dropping new bombshells and making things worse in an apology: Major material details of a product change shouldn’t come through an apology for something announced weeks ago. It’s like, “Sorry about that price hike and by the way, we forgot to mention….” Surprises in apologies are good when you’re announcing a rebate or some benefit for customers, not when you’re going to make the product change even more complicated. There is a communication problem, but the bigger issue is with the actual decisions being made. I think consumers understood the change pretty well, at least until this announcement, and just didn’t like it. These new details about separately branded services and multiple accounts won’t make people like the change any better. Is anyone going to say, “Thank goodness they separated my DVD service, put it under a new brand name, made me keep track of a new account, turned one monthly bill into two and made me rate movies in two places because I know it will make both services better in the long run?”
Separating services can make it easier for each to concentrate on its own path, but I don’t buy that this can’t be done behind the scenes without impacting consumers so much and requiring a whole new brand. A few months ago, I expected to always be a consumer proponent of Netflix, not a critic, but the short term missteps just seem to keep on coming. Only time and the market will tell if things turn out.