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Sep 20

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Ever heard of “Qwikster”? Netflix makes a dreadful business decision.

In the film “O Brother Where Art Thou?”, one memorable scene has the smooth-talking, escaped convict Everette (George Clooney) offer circular justification for stealing a pocket watch. Everette’s fellow-escapee, Pete, hears out the reasoning before declaring with annoyance and disgust, “That don’t make no sense!” I had a reaction similar to Pete’s upon reading the explanation that Netflix CEO Reed Hastings offered in a blog posting Sunday night for why Netflix decided to introduce a 60% price hike. In that post, Mr. Hastings effectively states the following (slightly modified):

1. All of you (Netflix customers) are upset over our recent 60% price hike.

2. If I, Mr. Hastings, arrogant man that I am (his words), had only done a better job of communicating with you, I’m sure you wouldn’t be upset.

3. We jacked up prices 60% because we planned to split our company into two separate entities with two separate websites: one that offers streaming only, and one that offers DVDs only.

4. Our new company will have the new name “Qwikster”, which will likely confuse consumers and divorces a huge line of business from the brand name that Netflix has built over the past twelve years (my commentary).

5. Now, if you want both DVDs and streaming, you have to subscribe separately through two different websites. You will see separate charges on your credit card statement. If you want to stack your DVD and streaming queues, you must log in to each website separately. If you need to update address and credit card information, you must do so on each site separately. If you rate or review a movie on one website, it doesn’t show up on the other website. But we think this will be a simplified experience for the consumer.

6. I, Mr. Hastings, am at a complete loss when it comes to identifying meaningful consumer benefits that arise from this move.

7. There you have it, if only I had communicated all this upfront there wouldn’t be so much customer backlash over sending your subscription prices through the roof.

In July Netflix stock was nearly $300. It closed on Monday at $143.75. In the meantime, Mr. Hastings has been selling Netflix’s stock like mad. Marketwatch reports that he has cashed out $41 million at an average price of $236 per share.

Mr. Hasting’s blog post has missed the point entirely. Communication has nothing to do with the problem. If anything, Mr. Hasting’s efforts to be a better communicator are creating serious doubts about his business acumen. His communication has provided a view into the executive’s thinking that has me wondering whether Netflix’s success to date was pure dumb luck — rather than success born of the sort of genius that instills confidence in future success (and sends stock prices higher). Rather than blogging his stream of consciousness on a Sunday night, the CEO should probably put away the laptop and spend some time with his advisers rethinking a monumentally ill-thought move.

Here’s the problem. Splitting Netflix into two companies might be attractive to Netflix’s managers for a variety of reasons. I’ve given little thought as to what these reasons might be because the consumer does not care at all about making a company manager’s job easier. If the move does nothing to improve service to consumers, it is a complete failure.

Mr. Hastings’ rambling post cites what he claims are two specific improvements in consumer service. These are:

1. “…simplicity for our members (since) each website will be focused on just one thing”, and

2. Netflix will “add a video games upgrade option.”

The problem is that turning one website into two creates headaches, not simplicity, for consumers (see item #5 in the summary above), and adding a video upgrade option does not require splitting into two companies.

But that’s the explanation behind the 60% price hike.

Unsatisfied? Me too. And so are many other Netflix customers. Marketwatch reports that “as recently as July 25, the company was expecting to have 25 million customers by the end of this month. Now it expects 24 million. That will actually be about 600,000 fewer than it had in June.”

Qwikster envelopes won’t be showing up at my mailbox since I’ll be cancelling the DVD service next week, just before my subscription price is set to increase. In the meantime, I’ll be shopping around for alternative streaming services.

About the author

Eric Madsen

Mr. Madsen is a Chartered Financial Analyst (CFA) charterholder and a Manager at Fulcrum Inquiry, a finance and economics consulting firm that performs economic damages analysis involving commercial litigation, financial investigations, business valuations, and forensic accounting. He also holds an MBA from the UCLA Anderson School of Management and a B.S. in Economics. He conducts expert analysis in finance and economics. Mr. Madsen may be contacted at 213.787.4122 or at emadsen@fulcrum.com.

Permanent link to this article: http://betweenthenumbers.net/2011/09/ever-heard-of-%e2%80%9cqwikster%e2%80%9d-netflix-makes-a-dreadful-business-decision/

9 comments

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  1. Ross Luetkemeyer

    So Netflix (NFLX) is down more than 33% since company changed its customer fee plan in early July. Chief Executive Officer bonehead moves…

  2. Oliver Lauck

    I read the Netflix email and I’m worried the CEO might start showing up outside customers’ bedroom windows blasting “In Your Eyes”.

  3. Clay Yotter

    On the Netflix blog, the Chief Executive Officer compares Netflix to AOL & Borders, companies “great at something”. Way to associate your company with failure!

  4. Booker Beyett

    Netflix is splitting up into 2 companies. I better make room in my cardboard shelter for their CEO, since he’s going to be homeless soon.

  5. Noble Rosario

    Someone should tell the Chief Executive Officer of Netflix not to send out personal emails on company time.

  6. Theodore Tate

    BREAKING NEWS FOLKS: Angry Netflix Customers Split Chief Executive Officer Into Two is driving me crazy. Someone tell them to stop?

  7. Jamal Sheakley

    I find it highly ironic that the Chief Executive Officer of Netflix referred to AOL and Borders in his explanation of the Netflix split. Foreshadowing?

  8. Daniel Nolte

    Why does any firm ever split itself in half? It is almost always because management thinks that one half will be a boat anchor on the other. In this case it is obvious that senior management believes that disk-by-mail is rapidly becoming obsolete.

    Here is the irony. If because of this decision Qwikster ends up a disaster the likely reaction at Netflix management will be a combination of ‘I told you so!’ and ‘aren’t we lucky those folks aren’t a part of us any more!’

  9. Rocio Ribero

    Thanks for your postings about Netflix. They’re very illuminating! The apologies from Netflix are crocodile tears… we’re going to look for some smart competitor who might be able to capture all the dissatisfied Netflix ex-customers!

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