Netflix’s Woes, Continued

In the wake of Netflix’s pricing increase, it’s been estimated that they’ve lost somewhere around 1 million customers. On Sunday night, Netflix CEO Reed Hastings attempted to explain the move. He starts off the announcement by saying “I messed up. I owe everyone an explanation.”

He then proceeded to explain how he would make up for everything… by totally screwing over customers even more.

Essentially, Netflix is splitting into two independent entities (both owned by the same parent, for now). One is the DVD by mail service, which will work the same as ever, but which will not be named Qwikster. The other is the streaming service, which will retain the Netflix name. I see no reason to do this, but whatever. Maybe it’s an accounting thing. But then Hasting drops the bombshell: “ and websites will not be integrated.” Um, what? All the sudden, this whole thing went from baffling to insane. The ratings you give movies on Netflix won’t be reflected on Qwikster (and vice versa), if you want to change address or credit card info, you have to do so on both sites, and you presumably won’t be able to tell if a movie is available on streaming when looking at the Qwikster website.

Now look, I’m not a Netflix hater. I love the service and even with the price increase, it’s a great value. I remember the old days of Blockbuster and do not want to return. I even defended their price increase back in July, essentially calling all the controversy an infantile response to Netflix’s reasonable reaction to unreasonable studio demands. If the studios charge 10-100 times as much for Netflix to stream movies, it’s only natural that the price would increase.

But this new change is utterly ridiculous. What’s more, it seems to make no sense whatsoever. I’m not an expert in business practices, but I can’t find a single compelling reason to make this change at all. There isn’t a single operational benefit to the switch and there’s now a massive usability hurdle placed in front of the customer. I suppose there could be some sort of internal accounting or business or stock reason to make this change, but even that doesn’t make sense. In July, their stock was nipping at $300 a share. Now? It’s at around $130 a share. How does this benefit them? My guess is that the stock will rebound a bit, but that they’ll continue to bleed subscribers. The only thing I can think of is that Netflix really does want to just sell off the DVD business and focus on streaming. Depressing the stock prices the way they have means that maybe potential investors will see it as a more attractive investment or something. I don’t understand why that would be a viable option, but it’s the only thing I can think of…

For the first time since subscribing to Netflix over 6 years ago, I’m looking into alternatives. I will most likely keep their streaming service, but the way they’re setting up the DVD service seems to beg customers to look for alternatives. Before the split, Netflix was a unique value proposition. You had access to nearly every movie available on DVD. The streaming selection was limited but growing, and you could always fall back on DVDs if needed. Now? There’s no compelling reason to use either of Netflix’s services. The only thing that could save this would be if Netflix actually expanded their streaming selection significantly, something I don’t see happening anytime soon. And if they keep bleeding customers the way they are, their position at the bargaining table will only get worse as time goes on.

Streaming may be the future of video content, but there’s a fairly significant chicken-and-egg problem that needs to be solved first. In order to get favorable deals with the studios, the streaming service must boast a very large number of subscribers. In order to get those subscribers, a streaming service must boast a very large selection. Again, I don’t see how this move helps Netflix in any way.

In the end, I’m flabbergasted. I just cannot comprehend what is going on right now. Netflix was great while it lasted. It’s a shame it’s going away.

3 thoughts on “Netflix’s Woes, Continued”

  1. Two thoughts.

    One, the only reason I can see for a complete split is if one business model is losing money and the other isn’t. This doesn’t really make sense, though, as everything we know about what’s going on would suggest that the streaming service would be the half losing money…so why would you fasten the “Netflix” name to the losing side? But, it’s either that or something that we don’t know about, such as the accounting stuff you mentioned.

    Two, I thought that when the prices were raised Netflix gave the option of continuing with streaming-only at the then-current rate, or you could take streaming AND and DVD for an increase. Hang on, I think I’ll just go check right quick.

    Yeah, I’m on unlimited streaming plus one DVD. Can’t find any info on what happens when the split occurs. Will my unlimited streaming cost go back down to $8?

    I am, for the moment, planning to stick with Netflix. Out of all the services I’ve tried, Netflix is still by far the best for streaming and DVD-by-mail.

  2. I am in total agreement with you. I was not upset by the price increase. I’ve never had a cable subscription as an adult (only when I was a kid and my parents paid for it), so I’ve either gone without or relied on Netflix and now online streaming (i.e., for my TV and movie viewing. When Netflix added instant streaming and included TV shows in that? Oh hell yeah, I was willing to pay more. It make sense – more product and more expensive product = more cost to the consumer.

    I had gone down to a Watch-Instantly-only plan with Netflix because I just wasn’t watching many movies, but then in the past couple of months I’ve been really interested in seeing more films. I was just about to bump up my plan to include DVDs again, but with this change, that would be a huge pain in the ass. I might still do it if Netflix is offering the best DVD-by-ail service, but I will definitely look at alternatives.

  3. I can’t really say that the streaming side of the business is losing money, but I do know that the overhead of that side of the business is miniscule compared to the DVD side. DVD by mail is a ridiculously expensive proposition, involving thousands of employees, lots of physical storage space, not to mention the purchasing of all the physical media itself, and of course there’s the fact that mailing the discs costs money in and of itself. I don’t know any numbers, but I’d wager that their margins on the DVD by mail business are razor thin.

    And it’s getting worse. Now that they have streaming, it seems that most casual customers are dumping their DVD rentals, meaning that the only people left on the DVD side are huge movie nerds like myself who will rent 12 DVDs a month, which probably makes them very little (if any) money. I think the DVD service kinda depended on people renting things and not getting to them for a few weeks. Now that there aren’t as many of them left… I can see why they don’t like that side of the business. But again, I don’t see why splitting it off into it’s own thing that’s much more difficult to use is a benefit to anyone.

    It’s very possible that I’ll end up staying with Netflix/Qwikster, but I guess my point was that in the 6+ years since I’ve started with Netflix, the idea of even looking at other services was almost inconceivable. I’m about as happy with the current Netflix service as I’ve ever been with any service ever.

    The fact that Netflix is totally destroying their usability and accessibility for no apparent reason is such a clear sign of disrespect that I have a hard time excusing it. Raising prices I get, making my life more complicated and difficult (first world problems!), for no reason, is inexcusable.

    And if Blockbuster gets their act together, they could launch their own streaming service (hardly a simple proposition) and eat Netflix’s lunch. This whole thing just seems like a giant clusterfuck.

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