There are few marketing messages and press releases that can be taken at face value in a situation that is best described as damage control.
If you get an apologetic email from the CEO of one of the most admired Silicon Valley companies, an email that extends to a blog post, it's easy to expect you might respond in an emotional manner. This would be especially true if the email and blog post start with "I messed up. I owe everyone an explanation." Netflix members should read the complete blog post to learn how Netflix will change. To summarize, Netflix will become a streaming-only business, while DVD by mail service moves to an entirely separate business entity named Qwickster. Each business will have an independent website with its service fee(s) charged separately.
Within the blog post, Netflix CEO Reed Hastings spent 13 paragraphs explaining and justifying the price hike without making immediate sense. The short version is that the separate charges for DVD and streaming preceded a separation of the businesses and that by being separate, the two businesses will be able to improve. All this got me thinking. In a time when most businesses are integrating their services, Netflix is following a decentralized model that is difficult to reason with. In a best case, many Netflix users will be confused. They will be angry or happy. They may like the new Qwikster logo or they may hate it. In a worst case, they may be offended as they have been out of the communication loop before. I don't quite believe that Hastings is treating customers in the way they deserve: If he is going to the great length of providing an "explanation", it should be complete and offer Netflix customers clear-cut details.
Today's explanation that the separation is necessary to make both of its services better reminds me a bit of an evasive parent who answers a child's question with "because I say so." Netflix has every right to make any business decision it wants, but it has set itself up in a scenario where it should be playing with an open deck of cards. There is quite a bit of soothing PR strategy in Hastings' email, in his blog post and even a video he posted. However, the PR is backfiring at this point, leaving Netflix to face an outpour of emotions from media and customers it can’t control.
The strange part of this whole disaster is the fact that the reasons for Netflix' strategy change have been discussed for nearly a year, even by Hastings itself. With streaming service becoming more and more successful, having grown to more than 9.8 million streaming-only customers (of a total of 24 million users, of which 12 million have both streaming and DVD subscriptions), Netflix has found itself in mounting legal dilemma that eventually would force the separation of the two businesses.
On the DVD side, the first-sale doctrine applies as distribution law and enables Netflix to rent every DVD copy it buys. It could go into any Best Buy or Walmart, buy hundreds or thousands of DVDs, and turn around and rent them the same day. However, the first-sale doctrine does not apply to streaming content. Each title, or each library, needs to be negotiated separately. Rumor has it that movie studios were asking not just for fees per library, but for a revenue cut per user, while Netflix was interested in a fee per user who actually accesses streaming content. Paying a revenue cut from every user, even if they do not access streaming media, is business suicide. Remember, there are 2.2 million Netflix customers who do not stream movies at all, with an expected 12.0 million who may be categorized as occasional streamers since they stream and receive physical DVD copies. Can Netflix afford to pay streaming fees for someone who may not watch? No. Separating the DVD business and the streaming business makes sense from this perspective because two different legal models and two different license models apply. I will give Netflix the benefit of the doubt that the licensing scenario in the background turned into an unmanageable mess that put their entire business model at risk, forcing a radical change in the end. However, Netflix only has itself to blame for the forced change. The integration of streaming was an expected featured in Netflix and it is always more difficult to take a feature away than to add a new one. In hindsight, free streaming may eventually turn out to have been a mistake from the very beginning.
The current communication may be perceived as humble, but those who think about it closely, may see the very same arrogance of Silicon Valley that got Netflix into this problem in the first place. There is an apology for not communicating the reasons for a previous price increase, but there are no words to explain the reasons for the price increase, or the split and new name for the DVD business. Hastings leaves Netflix consumers with quite a bit of speculation - Why is the DVD business renamed and not the streaming business? Does that mean that Qwikster will slowly fade? What content will Netflix get in the future? – None of which is a good thing. We are told that Qwikster will get video game rentals (for an extra charge), but there is no information on streaming content, which is a big issue since Starz, Netflix' most important content provider at this time, is pulling out early next year.
Netflix has introduced uncertainty for its customers. If Netflix is caught between a fire storm of customer outrage and content cost structures, today's communication could enter marketing text books as one of the greatest PR blunders ever. At the very least, Hollywood now knows that Netflix needs content for streaming service to survive, meaning they (Hollywood, not Netflix) can start controlling the cost of its content even more.
Has Netflix set itself up for failure? Possibly. The only way out of this one is honesty with its customers; today's blog post wasn't a good example of that. On the business side, Netflix may not have had much choice.