Netflix has been a free fall on Wall Street as investors have become doubtful in the movie rental giants current approach to renting DVDs and Streaming Online Content. To further complicate matters, Starz which offers Netflix subscribers hundreds of new and old movies for immediate streaming has decided to end their relationship with Netflix. This isn’t because of anything Netflix did specifically other than Starz fears of how big they are getting and how Netflix streaming might cut into the cable broadcasting businesses earnings. As a matter of fact, Netflix has an offer on the table that is 10 times more that the current deal that they are both working under. This makes me wonder just how profitable the Netflix folks really are.

After apparently having a long think on the current state of affairs this weekend, Reed Hastings, Co-Founder and CEO, Netflix has issued a statement which is making it’s way to subscribers via email and is posted on the Netflix website.

The email states that the Netflix is sorry for having offended it’s subscribers by splitting the two services and raising it’s prices 60% if the subscriber chose to maintain the same service it had prior. The streaming service would be $7.99, the DVD by mail service would be $7.99, and Bluray versions would be an extra $2.00. In an effort to put some distance between the Netflix name and this separation, Netflix has created a new division of their business called Qwikster.com. the new website will handle business and pricing exactly as Netflix has been doing “and DVD members will go to qwikster.com to access their DVD queues and choose movies.”

Where I agree that streaming online content is different and could in fact support a different billing approach than lumping it into DVD sales. jacking the price up 60% was a huge mistake. Splitting the service and then doing small incremental cost increases would have been a lot smarter than the approach they took.

I am currently a happy Netflix streaming customer. I think the $8 bucks a month is a good value and I enjoy watching the movies and TV series that I do.  It will be interesting to see how this latest move is received by Wall Street and more importantly, their customers. Let us know what you think!

[spoiler]

Dear XXXXX,
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.

[/spoiler]

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3 COMMENTS

  1. Yeah got the email this morning. In all honesty I don’t need an apology. Netflix was clear about the pricing change and the services included with each option. Now I, as the consumer, can make an informed decision and continue on with my day. Sure it would be great to have DVDs included for the times when streaming isn’t an option (cough, Seinfeld, cough) but its no biggie.

  2. My thing isn’t the price increase, it’s their streaming of the movies i want to see seems to be getting smaller. Also… i don’t want to have to hit two separate sites. I liked the fact that i could browse one catalog and it gives me the option of streaming or DVD.

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