Dear Netflix – Think of the Children!

Reed Hastings, CEO of Netflix, sent me an email apologizing for the way Netflix communicated their most recent price increase. Some of you (okay maybe 20 million of you) also received a similar message. Mr. Hastings opened up and told us about his deepest fears and then he broke the bad news…it would be better for all concerned if the happy family of DVD and streaming content split up.

We’ll see the re-named, “Qwikster” every few days when we receive our beloved red envelopes and now they’ll even include video games. We’ll stay with Netflix and its streaming movies and TV shows. Mr. Hastings told us that this divorce was necessary so that both companies could provide us with better service.

I understand the reasons behind the split, focus is important for any business organization. We all know that sometime down the road the DVD will go the way of the VHS tape. (This will happen despite the constant foot-dragging of the content owners, but that’s a different column for a different day.) While this change is inevitable, it’s not going to happen this year or next. It will be several years before the amount of top-tier content (major movie and TV studio releases) available through streaming (other than pricey PPV models) services begins to rival what’s available on DVD. So, DVDs are getting old, the Blu-ray facelift for the technology didn’t catch-on (thanks in part to the content owners), but did Netflix have to send it away so soon?

Many homes are not prepared to live with streaming alone. Connecting a DVD has become easy, getting a high-quality internet connection to the living room with a friendly user interface and control function takes a bit more knowledge and skill. The cable and satellite companies spend millions of dollars every year on home service people who connect cable boxes, setup the TV and show people how to use the remote. I’m not saying we’re a long ways off, but we’re still a generation or two of TV equipment away from the “no-brainer” ease-of-use that’s necessary.

The current world of internet provided streaming content is a fragmented mess (as is the equipment offerings that receive that content) and this split just makes it worse. Say you just saw the advertisement for the new Nike “Mag” sneakers and want to watch “Back to the Future”. A few years ago you would hop in your car drive to Blockbuster and hope they had it in stock, or put it at the top of your Netflix queue and wait for delivery. While those options weren’t perfect you at least knew where to go for the movie.

Things got better, Netflix introduced their streaming solution and by 2008 had signed a deal with Starz (which recently announced they would not renew their agreement with Netflix) for increased content and while the library wasn’t huge there was a reasonable chance you could find your movie or at least something of interest. It was wonderful, one service, one search and I would quickly be able to watch or add the item to my DVD queue. Netflix was my one-stop shop for movie content and a nice helping of TV as well.

Well, just like the children of a separated couple, Netflix subscribers are going to have to deal with shared custody. We’re going to have to visit netflix.com, and qwikster.com to do the same search. Hey Mr. Hastings, how about you sharpen your focus, divide your teams do whatever is necessary, but why do I have to be in the middle of it? Why the need for two websites?

When I search for a book on Amazon’s website I see all of the possible formats; hardback, paperback and Kindle. One place, one account, one search, one set of recommendations…it’s nice and it’s simple. Watching TV is supposed to be entertaining not an online scavenger hunt.

If Netflix is going to charge more and then make us look in two places, why not make the second place Amazon, Hulu, Crackle, HBO Go, etc. Instead of being my primary source for video content Netflix has relegated itself to one of many, several of which charge lower rates or are free.

In the last few months Netflix has done significant damage to what was a very positive brand image. When I talk with non-subscribers I no longer hear “I really want to get that service.” The almost-arrogant roll-out of the price increase made Netflix seem like just another cable/satellite company. This latest action is going to make people all the more hesitant.

The significant failing wasn’t the communication of the price increase. It was an internal problem; Mr. Hastings and the rest of his executive team either hadn’t completely figured out what they wanted to do or they had and didn’t want to tell their shareholders and employees. The result is they’re now facing a nervous workforce, a huge hit to their stock price, made it more difficult and expensive to remain a customer and caused prospective customers to hesitate. This is hardly a formula for success. I almost wonder if Netflix is working with the same playbook that Hewlett-Packard seems to be using lately.

However, Mr. Hastings isn’t entirely wrong. He is correct to be concerned for his company’s future. He cited AOL and Borders, but the best example of what could happen is BlockBuster. BlockBuster never seemed to understand where the market was headed, they held onto poorly managed retail stores and customer unfriendly pricing models and late fees for way too long. They continued to operate like they were the only game in town and failed to take Netflix and Redbox seriously until it was way too late. If I was Mr. Hastings I’d also be afraid of winding up like their former nemesis.

Another serious and potentially more ominous problem for Netflix involves the US Postal Service. Netlfix is one of the Postal Services largest customers. It’s the lifeblood of their DVD distribution model and through some pretty neat technology they have pretty much mastered the art of receiving and sending out DVDs. It’s hard to foresee a profitable future when your most important partner is threatening large price increases and reduced delivery days. Mr. Hastings knows that one less delivery day means greater customer discontent.

I am sure that Qwikster will be shopped around quite actively. It will be sold off to another company and eventually fade into a niche provider.

So, Mr. Hastings, really, we do understand what you’re facing, It just seems that instead of working through the issues and rolling out a strategy you did things a bit backwards and cost yourself a lot of good will in the process. Hey, breakups are tough, but a little better planning and you might have had a more understanding audience both in the living room, your offices and on Wall Street. Also, it would have been nice if you could have just stuck together a little longer…for us kids.

Update: I read an interesting research note this morning from Michael Pachter of Wedbush Securities. He believes that Netflix may have split off the DVD service to allow Amazon to buy the streaming video side without incurring sales tax liability for its overall business in the locations where Qwikster/Neftflix has distribution centers. Were that to happen it would have some interesting ramifications as Amazon is gearing up to take on Apple in the digital content distribution marketplace.