Monday, September 19, 2011

The Netflix Post That Reed Should Have Written

Dear Subscribers,

I know you hate it when we do this. But here goes...

For 5 years we have integrated the DVD and streaming businesses -- and for those of you who used it you've gotten used to the really cludgy way we fit them together. Yes, there are many aspects that fit together well (one movie - multiple ways to view it) but there were other ways it was goofy (two queues, two or three play-type buttons). We experimented for years with making this easier and clearer. But over those years a few important things have happened. The people who use the site for DVD-only or Streaming-only has surged - growing way faster than the people who use us for both. 75% of all new customers only want streaming. That number is growing fast. The number who want both is dropping. Additionally, we've expanded to Canada and Latin America -- and no one anywhere else in the world is going to get DVDs - we can't ship them. So, for our entire future, our growth opportunity, is entirely in streaming. And finally, the economics of DVDs and streaming are totally different. Deals are complicated.

What to do?

While I have been consumed with this problem, I've also been critically aware of a basic business principle: it's very hard to shift a company from something they're great at (for us, shipping DVDs) and something new (for us, Streaming). These "disruptions" as they are called, tend to kill established companies. Almost always, the industry leader simply moves too slowly to adopt the new path, and once they do, they play catch-up until they fail. My biggest fear for these years is that we'd move too slowly into streaming. The problem for established companies is managing the existing users. In order to protect the business and the current user experience, a company moves very slowly. Not to do so would seem heartless and suicidal: screw up the user's experience in some way? are you crazy?

I'm not crazy, and i really do love our users. But Netflix isn't helping anyone by failing to lead the way into streaming. We're not helping our users if we stand by them to the point that we kill the company. For better or worse, today, i'm taking a stand and shifting our focus into Streaming. Everyone wants a simple website, everyone wants tons of great content. I believe we can better deliver on the things most of our current users want (and ALL of our new users), by separating these businesses.

It's going to be a little painful and you have to trust me that I feel the same pain. Inside Netflix virtually all of us use both services - discs and streaming - and we know that we're introducing something that has drawbacks. Needing to go to two different sites to manage our entertainment content... two accounts... all that. I could point to the fact that each site will be easier to use, or that the DVD site will finally be able to offer GAMES, but it really doesn't matter - the truth is there is going to be some disappointment and pain.

Qwikster will have its full attention on diminishing those difficulties as much as possible. We'll work with customers and iterate the website and service to make it increasingly better. We've done this in the past and you know we're pretty good at it. It takes some time, but we do get there.

There is no escaping the fact that NOT to do this would kill Netflix over the next decade; and as much as some folks are going to be bummed, I also don't believe you'd want me to make a decision that would do that. I'm sure many of you will quit the service in anger. We have raised prices over the past few months (to be fair - many people see a price DECREASE, and for those who use both services, it's really just a fairer price for what you get - but i suppose that isn't the point).

I'm sorry if this change feels heartless, or that i'm throwing some subscribers under the bus. These are not easy decisions, but truly made with ALL our customers in mind. In the past i've not been as communicative about these kinds of changes as i should have been. I seriously believe in corporate transparency, but i've not been willing to expose my concerns about the path we were on or the steps necessary to evolve through the difficulties. Our competitors are huge, and the opportunity is too. I don't believe the service will be worse for this, but i do believe that some customers are going to feel abandoned and unconsidered. I feel terrible about it. But i know it's the right thing to do and all I can say is that i promise we will work to win back your trust and your excitement in using the service, at a really attractive price, with the best content available.

Thank you for caring. I'll try to answer as many questions as possible.


Davis Freeberg said...

That would have been a better way to put it, but I still disagree with the underlying premise. Netflix is getting lulled into a false sense of safety by the content owners and will see their costs skyrocket once they divorce the services.

Netflix's advantage over everyone has been their fair use rights to the DVD. This allowed them to be price competitive without the support of the studios. The streaming deals are different yes, but when customers have the DVD to fall back on, it limits how much the studios can charge to the maximum price of the DVDtimes#ofexpected turns. By picking and choosing niche content for instant, Netflix is able to drive demand and still offer hits.

With the largest member base, it seems that now they switch tactics. Instead of being cheap with the studios they want to handsomely reward them. This is what forced the price increase that customers are rightly upset about. With 20Xmembers pay $10 towards streaming, they can afford contracts that no one else can. Redbox has no leverage with the studios for a digital site. For them to pay $200 million in a year would be crazy, let alone one studio. Hulu only has 1 million paying $9 a month. By using the size of their audience (and the price increase) to force content prices higher, they are maintaining the status quo and are preventing upstarts from challenging them.

Maybe this really is the best thing for Netflix as their membership base matures, but it's inconvenient enough to their customers that it will put a stop to their growth. It will be much more difficult to market both services one at a time, then to convince a customer to try a cheaper streaming movie because it's free* The future may be streaming, but by abandoning their customers for Hollywood, they have shown their true colors.

Rubin said...

Hmmm.. i don't think of them as abandoning customers for hollywood - i see it as abandoning current customers for future ones. No one in the rest of the world cares about DVDs; winning there is the best hope for the company.

They have 10M paying $10 for streaming, and another 10M paying for both. But the globe offers 10s of millions more customers, if they only diminish the efficiency of the services for 1/2 their current base. A hard call, for sure, but i don't think its just about content. More customers means more dollars for content - in a positive cycle (more content means more customers too). If they get the global biz, they'll have more access to more content. Which will help everyone.

The two websites separated sucks, for me. But even i can see the advantages. Let's see how they execute this...

Anonymous said...

Here's a suggestion that might help (unless it's too late). For a time, let every subscriber to one company get a certain number of freebies from the other company. Free always gets attention.

Also, it would be helpful to have another website listing all offerings and giving how each is available. Customer would simply click on that...

Jen said...

I appreciate the fact you took the time to better explain Netflix' motivation for moving forward like this. However, I am still confused: Operating from a customer perspective (not involved in how Hollywood Studios may or may not benefit from the split), why in the world would Netflix raise prices on it's customers for a sub-standard product in the 1st place?

Regardless of their international growth objectives, they "burned" their existing customer base (i.e. US base, I'm guessing?) by saying they offered streaming media then not having great content. What they should have done was continue to offer both services as options for one rate (tiering for additional usage or #units) and offer better content for streaming so we had options for viewing releases (1st rate releases, large selection, as large as is available via DVD), get us hooked, then once we were contented, addicted steaming customers, only then split the companies and pro-rate the services (90% streaming then 90% cost of service for streaming or multiple tiered rates where if you rent mostly DVDs, pay flat rate, but nominal increases for # of streamed movies (1, 5, 10+ a month - heavy streaming customers could pay more). If we were used to a great service, we would continue with the service. They did this all backwards. The splitting of the companies should have been invisible, internal and continue under one company name to maintain the integrity of the Netflix brand and preserve it's developed consumer loyalty. Even if DVDs are eventually phased out, the customers would continue to do business with Netflix for streaming since the customers had experienced success and continuity with the service.

Eventually customers would have probably weened themselves from DVDs, paying the same or slightly increased price all along. A small incremental price increase over a 2-4 year time span would not have been as painful or noticable and would have protected the customer base. There would have been grumbling, but not a mass exodus, I'm guessing. In this economy, your price increases can't outpace inflation by that great a degree.

If people are streaming movies they should pay for it, just as they do for renting a DVD (or for a slightly higher fee - not double the cost). Hollywood should figure out how to stream their content in lieu of creating a million DVDs. It cuts down on shipping and manufactuing costs, to stream instead of send DVDs doesn't it? Are the studios afraid of additional pirating if the A and B list movies are available for streaming? If so, then Netflix moved much too early to split the companies.

Why didn't they just develop both depts. in house until all of the was worked out?

The fact that they almost doubled the fees for both services before they even had great content to stream, just baffles me. The other fact that Reed H. sent out the note without addressing that is just as disconserting. From a customer perspective, this company doesn't seem to understand we will support them if if they offer great content at reasonable prices. Right now, I feel I'd be overpaying for both services (rate for just DVDs is very reasonable) and I don't want to use 2 different services. The key is we want flexibility and convenience. Netflix took a large step backwards in my opinion.

46bonanza said...

However this all shakes out one thing is certain , Reed has discouraged subscribers and hurt shareholder value . There is more pain ahead for his clumsy and uncharacteristic misstep. You should have been his PR guy Mike. Golden boy got this one very wrong . Sell NFLX!

Anonymous said...

As an older subscriber to Netflix I can recall all the wonderful announcements for the new Coca Cola or the Edsel, improvements that caused their companies loss of value and customers. If streaming is the future, and I use that service as well as the DVD service, then one must improve the quality and quantity of the streaming films. I happen to enjoy some of the very old clunkers that they offer - but I would not pay a premium price for the chance to see them. A very bad, mismanaged move that may indeed open the way for better competition by other companies who profit from the Netflix screw up.