Netflix abandons Qwikster spin-off plans; signs of trouble for CEO Hastings?

October 10, 2011

Netflix has abandoned plans to split its streaming video and DVD services, cancelling a Qwikster service and dedicated site and apologizing to customers in a blog post last week. As Cecilia Kang reported:

First Netflix said it was sorry. Now the video giant is reversing its unpopular decision to separate its DVD business from its online streaming business, in one of the most striking recent corporate missteps.

In a blog post, CEO Reed Hastings said Netflix was abandoning its plans to create a separate DVD service called Qwikster. Customers would no longer have to subscribe to two separate services if they wanted mail-order DVDs and streaming videos.

“It is clear that for many of our members two Web sites would make things more difficult, so we are going to keep Netflix as one place to go for streaming and DVDs,” Hastings wrote.

“This means no change: one Web site, one account, one password … in other words, no Qwikster,” he wrote.

The company’s stock immediately jumped in response to the announcement. By midmorning trade, Netflix shares were up 7 percent to $125.50.

Netflix, once the darling of the stock market and the biggest threat to cable companies, has suffered big subscriber losses and a retreat from stock investors after two wildly unpopular decisions.

Last July, it decided to increase prices by 60 percent for subscribers to both its DVD rental and online streaming services. Then, last month, it announced it would separate the two businesses — calling the DVD rental service Qwikster — which would require consumers to hold two separate subscriptions and log on to two different Web sites.

The decision made the Silicon Valley company a target of anger and ridicule. Late night comedians made fun of the company’s decision. Customers started Facebook pages aimed at encouraging users to quit the service.

Netflix will maintain the pricing schemes which were announced for the two services, however, much to the chagrin of customers happy with the previous cost structure. As AP explained :

Netflix generates more head-scratching plot twists than a cheap B-movie.

On Monday, the company said it would reverse a previously announced decision to put its DVD-by-mail and Internet streaming services on separate Web sites, a plan that was widely derided by Netflix subscribers.

People will be able to use both services under one account and one password, CEO Reed Hastings said Monday in a blog post.

Netflix Inc., however, plans to stick to pricing plans introduced in June, which means subscribers are now paying separately for streaming service and mailed DVDs. That change amounted to a price increase for most subscribers.

Netflix’s decision to stay one Web site is likely to please subscribers. But its turbulent relationship with subscribers over the last three months raises questions about the company’s management, as it attempts the transition from a DVD-by-mail business to one that largely delivers movies streamed over the Internet. Netflix movies can already be streamed directly to PCs, smartphones, tablets, DVD players, game consoles and TV sets.

The Qwikster announcement was a follow-up to the July price change. Analysts saw it as a way for Netflix to distance itself from the older DVD business, which has less future potential than Internet streaming.

Netflix had 24.6 million subscribers at the end of June, but it warned last month that it expected a net 600,000 to leave by the end of September because of the price increase. That would be by far the worst downturn in the company’s history. Netflix reports final figures on Oct. 24 for the quarter that ended in September.

Many see the back and forth from Netflix CEO Reed Hastings over the proposed change in structure as a sign of trouble for the company’s leaders. As Jena McGregor reported :

Qwikster, we hardly knew you. Netflix CEO Reed Hastings announced Monday morning via a blog post that he would not, after all, be splitting its DVD and streaming services into two Web sites and rebranding the DVD-by-mail service “Qwikster.” After the move was sharply criticized by the company’s customers and investors (not to mention that it had become fodder for late-night comedians), dumping the unfortunately named brand is not really all that surprising in the end.

What did surprise me, however, was how Hastings delivered the message. His blog post could not have used more straightforward language, and there was barely a hint of apology within it. “It is clear that for many of our members two Web sites would make things more difficult,” Hastings wrote. “So we are going to keep Netflix as one place to go for streaming and DVDs.”

That’s it. No “we messed up.” No “we’re sorry for any confusion this may have caused.” No “thanks for sticking with us while we sort this out.” While Hastings ended the brief post by saying “we value our members, and we are committed to making Netflix the best place to get movies & TV shows,” and a simple “thank you,” the post still managed to come off a little cold.

What’s especially baffling about this approach is that Hastings took an entirely different tone in his last post — the one that was supposed to be an apology, but only seemed to make things worse with customers. The Sept 18 blog post that first announced Qwikster, the two Web sites, and the greater explanation about the July price changes could not have been more different than the one that later reversed it. Hastings opened by saying, “I messed up. I owe everyone an explanation.” He was introspective, talking about his greatest fears, the “key thing I got wrong,” and the admission that he “slid into arrogance.” The content may have made people mad, and the message may have frustrated many, but his tone was at least warm, candid and reflective.

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