It took Coca-Cola 77 days of New Coke to bring back Coke Classic. It took *Netflix* co-founder and CEO Reed Hastings less than three weeks to shelf the idea of splitting Netflix (NSDQ: NFLX) into two brands — Qwikster to sell DVDs, Netflix for streaming; 23 days in all to admit publicly that the right strategy can turn out very wrong and to cancel the move before it kicked in.
Instead, while the businesses will split operationally, everything will stay under the Netflix brand and subscribers who get both services will keep one account. The company is sticking to one major change: the 60 percent price increase for those subscribers that was announced in July and took effect Sept. 1.
Qwikster was introduced in a blog post by Hastings and a video he made with Andy Rendich, who was to be CEO of the new subsidiary. Netflix spokesman Steve Swasey said Rendich still would head the DVD division, which will move to San Jose as planned, but declined to discuss titles. He wouldn’t pinpoint the timing of the decision to drop Qwikster but said, “We move very quickly.”
Netflix, which has been hammered by unhappy subscribers, the media and especially investors, announced the branding rollback this morning before the U.S. markets open.
No video for Saturday Night LIve to lampoon as it did in a web extra that didn’t make it to air (although the only way SNL could do this justice would be with Emily Litella — “Never mind.”) No overt apology either; that strategy didn’t work Sept. 18 when the decision to spin the DVD business off into Qwikster and separate the accounts was announced and probably would ring hollow now. You can only mea culpa so much and when you do, it has to be pitch perfect.
In the press release, Hastings, who may have more to add when earnings are released Oct. 24, said only:
“Consumers value the simplicity Netflix has always offered and we respect that. There is a difference between moving quickly — which Netflix has done very well for years — and moving too fast, which is what we did in this case.”
Netflix subs will get an e-mail from him with the news. Hastings posted to the corporate blog:
It is clear that for many of our members two websites would make things more difficult, so we are going to keep Netflix as one place to go for streaming and DVDs. This means no change: one website, one account, one password… in other words, no Qwikster.
Translation: The strategy of splitting the services wasn’t wrong. The execution wasn’t right.
Streaming is the company’s future; subscription DVD is a shrinking part of its present. Over the past year Netflix has moved further away from DVDs as confirmed by its streaming-only international expansion to Canada and Latin America, while its emphasis on streaming in the U.S. has come at the expense of DVD marketing. Hastings contends a split would give the DVD business the a chance to make the most of the its remaining lifespan, while allowing streaming to grow more quickly.
Among other aspects, the Qwikster spin off and brand change was supposed to allow each business to be marketed separately.
The stock, once a darling of investors, lost 48 percent of its value in the two months after the price change was announced and 24.5 percent since Hastings announced Qwikster on Sept. 18. The total loss since the July 12 price announcement: 60.8 percent, closing at $117.21 on Oct. 7. The market cap dropped to $6.15 billion from $13.9 billion on June 30.
The company also lost more subscribers than it projected originally. The changes announced July 12 separated streaming and DVD; unlimited streaming would be $7.99, while the lowest price for DVD subscriptions would be $7.99 for “unlimited” one at a time. Until the change, the basic streaming/DVD plan ran $9.99. Those who subscribed to both, about half of Netflix’s domestic subscribers, would pay just under $16, or 60 percent more.
In its Q2 earnings released July 25, Netflix said they expected domestic net adds to be lower because of the plan changes and price increase but that the “noise” was lower than expected.
The day the price increase started, Netflix execs were caught off guard by an announcement from Starz Entertainment that it had decided not to renew its licensing deal. The deal was supposed to include premium Disney (NYSE: DIS) and Sony (NYSE: SNE) first-run films but Netflix lost access to the Sony films earlier in the year when Starz reached a streaming cap and pulled them. Starz accounts for 8 percent of Netflix streaming but other programming deals were expected to take that down to 5-6 percent. The way it was framed made it look like Netflix was failing its subscribers, while Netflix execs felt like they had taken a stand not to give in to demands for higher pay at the cost of other programming.
On Sept. 15, Netflix admitted the losses were greater than expected and issued new guidance that it would lose 1 million customers in Q3 — 200,000 streaming-only subs and 800,000 DVD-only. The number taking both was expected to stay the same, about 12 million. Instead of hitting 25 million domestic subs in 2012, Netflix was projecting 24 million. It also has 1 million plus streaming-only subs in Canada; no numbers yet for its recent expansion to Latin America.
Then just three days later, when the market was still trying to absorb that news, Hastings announced the Qwikster spinoff.
Already perturbed by the poorly communicated price increase and negative publicity about the pending loss of Starz Play and it’s 1,000 or so titles a month, subscribers rebelled at the branding split for making a simple experience complicated. Many took the branding change itself personally, offended that DVD subs would be treated as second class. The choice of new brands didn’t help. Qwikster quickly became a punchline. Longtime users worried about losing their ratings and reviews along with their flexibility to move between DVDs and the more limited streaming library. Netflix execs expected some blowback but were surprised by the scale.
A company known for marketing and creating a near-iconic brand suddenly was tone deaf.
When the plan change was announced, Netflix skipped the chance to explain it in terms subscribers might understand. The blog post by Jessie Becker talked about costs but in abstract terms. If, for instance, it had mentioned to first-class cost of shipping one DVD as $.78 roundtrip and the other costs of involved, subscribers might have been able to see that taking that and other costs into account, at $2 a month Netflix likely would lose money on every DVD after the first one. The price “was not sustainable,” Swasey said.
Instead, Becker exposed a flaw. Netflix offered the streaming plus DVD to flip the proposition from DVD with some streaming and ease the transition. Netflix may have thought it could get away with that $2 add on because it expected DVD use to decline more rapidly than it did. When subscribers hung on to DVDs, Netflix added the DVD-only plan. From Becker’s post:
Given the long life we think DVDs by mail will have, treating DVDs as a $2 add on to our unlimited streaming plan neither makes great financial sense nor satisfies people who just want DVDs.
Even though Netflix saw a dip in DVD-only subs, the number of combo subs isn’t shifting. The difference for now is that they are paying full price for each service. Consider that the limited plan for two DVDs a month runs $5; $7.99 would seem to cover at least 3, possibly four a month.
Netflix failed to articulate its message in a way that made sense outside the boardroom and that cost it. It underestimated the attachment people had to the brand and, for now at least, the interest many had in maintaining access to the full Netflix programming library instead of relying on the more limited streaming.
It also looks as though Hastings and company may have underestimated the way some subscribers felt liberated to look at the competition. Netflix execs still believe what they offer is singular but the choices are multiplying. As an Amazon Prime subscriber, I get repeated reminders about the “free” video that’s now included. Hulu Plus continues to be the best option for current prime-time-plus library. The new Blockbuster Movie Pass is a relatively cheap add-on for existing Dish Network subscribers. (Netflix and Hulu Plus have a key advantage over Amazon, which is limited to PCs: portability across devices. That should start to change with the Kindle Fire launch.)
Splitting the two services completely and substituting that convenience for two bills left Netflix wide open. Canceling Qwikster before it was implemented won’t help Q3 but it may be a tourniquet for Q4.
It helps that Netflix has been able to live up to one promise: the addition of more streaming programming. The Netflix streaming catalog is more than a few fries short of a Happy Meal but it is growing. In recent weeks, Netflix announced an exclusive first-run linear and streaming deal with DreamWorks Animation, extended its contract and expanded programming from Discovery, signed an exclusive syndication streaming deal for Walking Dead and more programming from AMC Networks. More deals are in the pipeline, including possible new episodes of resurrected series.
But Netflix is still far from being able to offer the kind of library that will wean serious DVD users off the discs.