Netflix can’t catch a break.  First, the company created a new pricing structure that separated DVD-by-mail and streaming, but, in effect, raised the cost to most customers by a few dollars per month.  This was met with many loud complaints by customers that raising prices was somehow unfair[1].  The ramen-eating portion of the blogosphere exploded with profane threats of service cancellation.

Meanwhile, and far more relevantly, stock prices plummeted.  That prompted Netflix to overreact in the last couple of days, sending out a knee-jerk e-mail that contained an embarrassing and unnecessary mea culpa regarding price hikes and customer service.  Here are a few sample quotes from the e-mail:

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.

The customers who felt that way, to put this bluntly, are crybabies.  Apologizing to them (repeatedly) merely makes them feel justified and emboldened.

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)

This is precisely the point I’ve been making to anyone who will listen since Netflix announced the price increases back in June.

Think about what’s happening to the DVD rental market.  First, it’s shrinking.  Like every other kind of media, the shift happening now is toward streaming / instant / downloadable content and away from physical storage and plastic discs.

Secondly, Redbox has a better model: A kiosk with movies available on the spot, and, in many cases, for only a dollar.  In the same way that Blockbuster didn’t adjust quickly enough when Netflix created a better model for movie rentals, Netflix is looking at Redbox and realizes, “Either we adapt, or we’re Blockbuster (or Borders or AOL).”

By that same token, streaming will be the whole ball of wax within five years, possibly sooner.  Netflix is running into several problems when it comes to streaming.  The technology isn’t quite as fast or as reliable as it could be.  Price hikes help build that infrastructure.  The selection of movies and television could be better.  Price hikes help augment that selection.  Current contracts for certain content have IP distribution (subscriber) caps in them that affect the deals.  Thus, in an indirect way, “offending” the public and stopping the massive rate of subscriber growth actually helps current subscribers enjoy more content while new deals can be made that better account for the growth of Netflix.

Think about the service provided by Netflix for a moment: At the touch of a button, I can access a wide variety of current and classic movies, documentaries, and television shows.  The selection isn’t perfect, but it’s actually quite good and has gotten noticeably better just in the time that I’ve been a Netflix customer (especially on the television front).

And how much does this magical service cost?  $7.99 per month.  In a month, I might watch three or four movies and several[2] episodes of television, all in HD quality.  For $7.99.

Oh, but wait!  What if I want to have disc-based movies?!?  Well, get your strongly-worded e-mails ready, because that costs $7.99 a month as well.   If I want both services, I have to pay $15.99 a month!  And the atrocities don’t end there!  If I want to be able to check out the blu-ray versions of discs, it’s another two bucks, or $17.99 total!  Unconscionable!!!

Let’s get real: Netflix wasn’t charging enough before.  They built their customer base based on a structure of which streaming was initially a nonexistent component.  Now, with bandwidth concerns becoming much more pronounced, Netflix had to do something, or else risk losing its position as a market leader.  The same crybabies who had their feelings hurt by the price increase would have screamed bloody murder if their ability to watch movies instantly began to disappear on a regular basis if Netflix wasn’t able to accommodate the bandwidth at some future date.

Yes, the price increase for most folks was functionally 60% over what they were paying previously.  That sounds huge until you realize that we’re talking about an increase of about six or seven dollars per month.

So we realized that streaming and DVD by mail are really becoming two different businesses, with very different cost structures, that need to be marketed differently, and we need to let each grow and operate independently.

Bingo.  100% agreement here.  This is merely Netflix dealing with long-term viability.

Here’s where things go off the rails a bit . . .

It’s hard to write this after over 10 years of mailing DVDs with pride, but we think it is necessary: 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.

Uh-oh.  “Qwikster?”  Terrible name.  Forgoing the goodwill associated with Netflix (even though it’s taken a PR hit recently) is a poor decision.  This seems like a rash action taken in response to the (unreasonable) complaints referenced above.  A better course would have been to brand streaming as “Netflix” or “Netflix Instant” or the like and re-brand delivery as “Netflix by Mail” or “Netflix ________,” with the idea being that the company can split itself into two independent divisions and still maintain the Netflix name its worked so hard to enhance[3].

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 qwikster.com 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, but now that DVD by mail has its own team, we are finally getting it done. Other improvements will follow. A negative of the renaming and separation is that the Qwikster.com and Netflix.com websites will not be integrated

Wait, what’s that?  PS3 games will now be part of the package (with an upgrade)?  You just won me back over, Netflix . . . or, I should say, “Qwikster.”

Most people won’t even be aware of this, but, depending on pricing, this is potentially a huge blow to Gamefly.  If Netflix/Qwikster can capture that market as well, it will open up a significant new revenue stream in the short-term[4].

I want to acknowledge and thank you for sticking with us, and to apologize again to those members, both current and former, who felt we treated them thoughtlessly.

Ugh.  Shut up, already!  Stop catering to these p***ies!  Good gravy . . .

Both the Qwikster and Netflix teams will work hard to regain your trust. We know it will not be overnight. Actions speak louder than words. But words help people to understand actions.

Respectfully yours,
-Reed Hastings, Co-Founder and CEO, Netflix

Broken record time: Are we really so soft as a society that a few dollars per month price increase makes us feel collectively violated[5]?  Get over it.

I will continue happily paying somewhere south of $20 per month for these two services, one of which would have seemed quite clever and the other of which would have seemed miraculous just a few short years ago.  Thank you, Netflix.

_________

[1] This puzzles me to no end.  Companies raise prices all the time, depending on costs, supply, and demand.  A lot of the more entitled Netflix customers make it seem as though the company should have taken a vote before making a policy change.  Big eye roll here.  Note that many of these are the same people who adamantly and emotionally believe that Jay Leno is evil for not refusing to take back the Tonight Show when NBC offered it to him.
[2] Ok, let’s be honest: Dozens.
[3] Not only that, but doesn’t most of the tech-savvy public associate sites whose names end in “-ster” with failure, or at least a bygone era of the internet?
[4] Unfortunately, as I said at the top, video games are also moving more and more toward downloadable titles.  The only difference there is that the concern over piracy is much more pronounced, and will probably keep disc-based games prominent even beyond the time when disc-based movie rentals are all but dead.
[5] This is the kind of stuff that makes me feel like we could never ever win another large-scale war.  Not because of our military, but because the people back home wouldn’t have the stomach for anything remotely upsetting, not to mention sacrificial.