Netflix Admits that They Goofed, But Not For What You Think

Back in July Netlflix announced that they would be raising prices. Basically doubling prices for some users. At the time, I was paying $9.99 for the streaming package + 1 DVD out at a time. The price change was to take affect on September 1, 2011. They split the streaming into two separate plans, each costing $7.99 for a total of $15.98 per month. I immediately changed my plan to the streaming only plan. I was probably one of the few that did not get the DVDs much. And I had ended up losing one in the house (thanks kids), so it made sense for me.

In addition to the Netflix stock dropping when the change took affect earlier this month, it is now reported that Netflix has lost well over 600,000 subscribers since announcing and implementing the change. Why the huge drop? People do not like to get less for more $$. It was announced the same day that the price change took affect that Starz has decided not to renew their streaming deal with Netflix. This takes away a huge chunk of the good movies that Netflix offers. The contract is set to expire in February 2012. They also recently lost movies from Sony. And, HBO has consistently refused to partner with Netflix. A statement released at that time by Neflix spokesman Steve Swasey stated:

Starz has been a great content partner since 2008 and we are thankful for their support.

While we regret their decision to let our agreement lapse next February, we are grateful for the early notice of their decision, which will give us time to license other content before Starz expires.

While Starz was a huge part of viewing on Netflix several years ago because it was some of the only mainstream content Netflix offered, over the years Netflix has spent more and more licensing great TV shows from all four broadcast networks and many cable networks, and we have licensed 1st run movies from Relativity, MGM, Paramount, Lionsgate and others. Because we’ve licensed so much other great content, Starz content is now down to about 8% of domestic Netflix subscribers’ viewing. As we add even more content in Q4, we expect Starz content to naturally drift down to 5-6% of domestic viewing in Q1. We are confident we can take the money we had earmarked for Starz renewal next year, and spend it with other content providers to maintain or even improve the Netflix experience.

We have tremendous respect for the Starz creative team, and we look forward to someday licensing some of their original or licensed content.

And now today, Netflix subscribers received the following apology email from Netflix CEO Reed Hastings. It is not apologizing for the price hike, but instead apologizing for not explaining the reasons for the price hike in more detail:

Dear Kristile,

I messed up. I owe you 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. Let me explain what we are doing.

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). So we moved quickly into streaming, but I should have personally given you a full explanation of why we are splitting the services and thereby increasing prices. It wouldn’t have changed the price increase, but it would have been the right thing to do.

So here is what we are doing and why.

Many members love our DVD service, as I do, because nearly every movie ever made is published on DVD. DVD is a great option for those who want the huge and comprehensive selection of movies.

I also love our streaming service because it is integrated into my TV, and I can watch anytime I want. The benefits of our streaming service are really quite different from the benefits of DVD by mail. We need to focus on rapid improvement as streaming technology and the market evolves, without maintaining compatibility with our DVD by mail service.

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.

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.

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.

There are no pricing changes (we’re done with that!). If you subscribe to both services you will have two entries on your credit card statement, one for Qwikster and one for Netflix. The total will be the same as your current charges. We will let you know in a few weeks when the Qwikster.com website is up and ready.

For me the Netflix red envelope has always been a source of joy. The new envelope is still that lovely red, but now it will have a Qwikster logo. I know that logo will grow on me over time, but still, it is hard. I imagine it will be similar for many of you.

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.

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

p.s. I have a slightly longer explanation along with a video posted on our blog, where you can also post comments.

Oh, and let’s not forget that there was also a rumor that they are now going to limit the number of devices that can stream media concurrently to 1. But, Netflix has denied that report. Thank goodness they have denied. That would really suck for my household.

I am just waiting and watching. I still have my streaming only plan. I am hoping that they can find some other sources to partner with to continue to bring exciting movies. I do have cable, but I can honestly say that my household watches Netflix a lot more than we watch cable.

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