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A Split Decision: The Critical Analysis of Netflix’s Communication Strategy during the Development of Qwikster

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Lecturer David Robinson prepared this case study with Max Oltersdorfas the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. This case represents a fictional portrayal of a public figure based on published sources. It is written for educational purposes and classroom discussion.

netflix and qwikster case study

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This article revisits the long tail phenomenon, a dozen years after it was first articulated as a model for the digital media economy. As this article illustrates, both the research evidence and the evolution of industry practice have demonstrated that the long tail phenomenon has failed to take hold to the extent expected. This article outlines the interconnected technological, institutional and economic factors that explain the decline of the long tail, and considers the implications of this decline for media policy and media research.

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This article focuses on the emergence of a nascent streaming industry. The media industry studies conceptualization of “industry lore” can be read during times of transition for media industries. Streaming lore is a re-articulation of existing industry lore accompanying the advent of streaming technology and distribution. Contemporary streaming acts as a site of rupture, wherein industry discourses related to digital media are rendered visible. The article proposes three categories of emergent streaming lore and analyzes their relation to a growing streaming media industry. These categories include (a) Netflix as “quality” streams, (b) the algorithmic audience, and (c) cord-cutters and cord-nevers.

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Tenendo un approccio in parte storiografico, e in parte di analisi industriale, l’obbiettivo che questo testo si prefigge è quello di, da una parte, rendere evidenti quelli che sono stati i motivi che hanno reso Netflix un’impresa di successo contro ogni previsione, dall'altra come questi motivi la rendano diversa da qualsiasi altro progetto simile che si è lanciato (o è in procinto di farlo) in questo specifico tipo di mercato.

Media, Culture & Society

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Branding has been described as the defining industrial practice of television's recent past. This article examines publicly available industry documents, trade press coverage, and executive interviews to understand the place of traditional television network branding in streaming video on-demand (SVOD) portals as represented by Amazon and Netflix. Focusing on materials relating to licensed rather than original content and the role of such content within the U.S. domestic SVOD market, two distinct approaches emerge. For Amazon, the brand identities of some television networks act as valuable lures that draw customers into its Prime membership program. For Netflix, linear television networks are competitors and their brand identities are seen as impediments that reduce Netflix's own brand equity. Nonetheless, for advertiser-supported cable networks, the benefits of network branded content on SVODs remains unclear. Ultimately, Amazon's efforts to build a streaming service alongside network brand identities and Netflix's efforts to build its own brand at the expense of such identities demonstrates the need to think about contemporary television branding as an ongoing negotiation between established and emerging practices.

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Television as a medium is in transition. From DVRs, to Netflix, to HBO Now, consumers have never before had such control over how they consume televisual content. The rapid changes to the medium have led to rhetoric heralding the impending " post-TV era. " Looking at the ways that legacy television companies have adapted to new technologies and cultural practices suggests that rather than traditional television going the way of radio, television as a medium is actually not terribly different, at least not enough to conclude that we have entered a new era. Press releases, discursive practices by the news media, corporate structures and investments, and audience research all point to the rhetoric of post-TV as being overblown. By thinking about contemporary television as being in transition, greater emphasis and attention can be placed on the role that major media conglomerates play in developing, funding, and legitimizing new forms of television distribution, in addition to co-opting disruptive technologies and business models while hindering others.

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Netflix’s Bold Disruptive Innovation

  • Adam Richardson

Every now and then, the business world presents us with a lab experiment that we can observe in realtime. Netflix’s announcement that it is splitting off its DVD-by-mail business from its streaming business is just such an experiment. The DVD business will now go by the name Qwikster, and the streaming business will stay under […]

Every now and then, the business world presents us with a lab experiment that we can observe in realtime. Netflix’s announcement that it is splitting off its DVD-by-mail business from its streaming business is just such an experiment. The DVD business will now go by the name Qwikster, and the streaming business will stay under the Netflix brand. It is Clayton Christensen ‘s innovator’s dilemma incarnate, and Netflix is very publicly trying to solve it. Like its 60% price increase did earlier this year, this move is understandably causing consternation amongst some customers. It’s a bold move, one that will cost them in the near term, but Netflix I’m sure has done the calculus and is looking at the endgame 5-10 years out, not 5-10 months.

  • Adam Richardson is a creative director at the global innovation firm frog design and the author of Innovation X: Why a Company’s Toughest Problems Are Its Greatest Advantage . His background combines experience in product development, product strategy, and customer research.

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netflix and qwikster case study

  • The Inventory

jalopnik

As Netflix turns 20, let’s revisit its biggest blunder

No one survives this long without a few embarrassing moments.

We all have those moments we’d rather forget. Let’s revisit one of Netflix’s on the 20th anniversary of its launch.

The streaming-video behemoth, which upended nearly every aspect of the movie and TV businesses over its two-decade history, may seem unstoppable now. But in 2011, its ambitions nearly spelled its demise.

The online-video service, which started out renting DVDs by mail, was three years into experimenting with on-demand streaming and CEO Reed Hastings knew it was the future. With streaming video, Netflix could bring movies and TV to the world, as it started to do in 2010 in Canada , the first country Netflix entered outside the US. (Today, it is nearly everywhere in the world .) However, Hastings ran before he could walk when he abruptly announced in July 2011, against better counsel  (paywall), that Netflix would splinter its DVD and streaming subscriptions.

Instead of paying $10 a month for DVD rentals and unlimited on-demand streaming, customers who wanted both services would have to pay for two different packages, each starting at $7.99, or $15.98 for the pair. “With this change, Netflix will no longer be offering unlimited plans that include both streaming and DVDs by mail,” Netflix unceremoniously announced in a release  on July 12.

At first, the stock rose to an all-time closing high of $42.68, with investors drawn to the additional revenue per subscriber the move might produce. The stock wouldn’t reach that level again for more than two years. Subscribers swiftly expressed their displeasure about having the DVD rentals that attracted them to Netflix removed from the convenience of on-demand streaming. The dual plans effectively amounted to a 60% price hike.

Image for article titled As Netflix turns 20, let’s revisit its biggest blunder

After two months, during which Netflix’s stock lost half its value, Hastings addressed the issue in a blog post that apologized for the way the strategy was announced—and then doubled down on the plans. The Sept. 18 post began:

I messed up. I owe everyone an explanation. It is clear from the feedback over the past two months that many members felt we lacked respect and humility in the way we announced the separation of DVD and streaming, and the price changes. That was certainly not our intent, and I offer my sincere apology.

It went on to say that the DVD service would soon be called Qwikster.

We realized that streaming and DVD by mail are becoming two quite different businesses, with very different cost structures, different benefits that need to be marketed differently, and we need to let each grow and operate independently. It’s hard for me to write this after over 10 years of mailing DVDs with pride, but we think it is necessary and best: In a few weeks, we will rename our DVD by mail service to “Qwikster”.

The site’s login credentials, billing, ratings and reviews would not be integrated into the streaming service’s, the release added. So if a customer with both services needed to change their billing or contact information, they’d need to do so in two places. And their ratings and reviews on Qwikster would not show up on Netflix, and vice-versa.

The move did nothing to calm customers and Netflix cancelled plans for the service less than a month later, while leaving the DVD and streaming plans separate. “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,” Hastings said in a statement. The whole ordeal cost the company about 800,000 US subscribers in the third quarter of 2011 , its first decline in years. For years afterward, planned rate increases made investors skittish.

Netflix ultimately learned from this youthful blunder and got smarter about the way it hikes prices . Last time it raised rates in the US, it signed up more new subscribers than ever,  because the increase was modest and imposed during a quarter that also included the return of some of its hottest shows such as The Crown, Stranger Things,  and  Black Mirror,  and new releases like  Bright  and  Mindhunter.  It now has 117 million streaming subscribers worldwide, up from the 24 million or so total members it closed out the third quarter of 2011 with. The DVD business lives on, with about 3.4 million subscribers at last count.

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Netflix’s Qwikster Debacle

  • David Zax archive page

As you’ve no doubt heard, Netflix has now pivoted on the pivot of its recent pivot. A few months ago, it announced that it would be separating the cost of its DVD-by-mail and its streaming plans, creating an effective price hike for those who had taken advantage of the company’s bargain bundle subscription. Outrage ensued. Then, a few weeks ago, CEO Reed Hastings emailed subscribers again to announce another change: Netflix would be separating its DVD and streaming services entirely, redubbing the former “Qwikster” and assigning it a separate, albeit linked, website. More outrage ensued. And just yesterday, Netflix announced a change to the change: the customers had spoken; Qwikster was a bad idea; the plan to divide services would be scrapped. Murmurs of confusion and disbelief ensued.

All in all, it has been highly erratic and ill-planned behavior for a star of the Web 2.0 era. What is going on in Hastings mind?

Each of Netflix’s business decisions may well have been sound. A price hike associated with the DVD-by-mail services seemed inevitable–mailing costs were simply too high. Indeed, with the majority of Netflix’s new customers signing up for streaming-only plans, and with streaming an increasingly powerful force from Hulu and Amazon, it’s clear that the real future of the business is in the cloud, not in the optical disk, and Netflix is right to focus on battles on that front.

Even so, Hastings didn’t need to say so. The main problem with Netflix’s recent moves has been less the business case for them (many analysts agree that the price hike, in particular, was necessary). Rather, the main problem was Netflix’s handling of the changes–the garbled emails sent by Hastings, the poor timing, and the overall sense of indecision hanging over the whole affair.

Here are a few things Neflix might have done differently, in retrospect. First of all, it should have continued to offer some sort of reward to existing customers who had signed up for a bundled streaming-plus-DVD option. As one of those customers myself, I felt irritated that my earlier decision to spend an extra $2 for DVDs was not honored or rewarded in any way; even if I had been informed that existing bundlers were being given a mere $1 discount over new subscribers, I would have felt my early loyalty to Netflix was being honored.

Second, if Netflix was set on both raising prices and separating its two services, it ought to have made those announcements simultaneously. The steady pulse of one weird, sweeping change after another was too much to bear; it was only after the Qwikster announcement that I personally decided to cancel my DVD subscription.

Third, and most importantly, someone could have actually edited Reed Hasting’s emails and blog posts. Indeed, Neflix’s entire PR strategy ought to have been more thoroughly thought out from the beginning.

There are so many communications missteps that they are difficult to list. Netflix underestimated the iconic appeal of the traditional red envelope with its familiar name affixed to it; even if DVDs constituted the withering branch of Netflix’s business, it needed to be properly honored as the artifact that started it all. The name “Qwikster” could have been given more than a modicum of thought; so silly is it–instant streaming is a whole lot “qwikker” than the US Postal Service, after all–that I nearly checked my calendar to make sure it wasn’t April 1st. (The corresponding Twitter handle appears to belong to some kind of stoner .) Hastings should have also realized that an email that began “ I messed up ” would be expected to contain some sort of apology or reward–perhaps those price changes would be revoked after all!–rather than a new form of punishment and source of irritation. Stepping on someone’s toe repeatedly while saying “I’m sorry” is an apology in name only.

Finally, Hastings ought to have realized that while the ins and outs of the business case for Netflix’s maneuvers are interesting to tech bloggers and business analysts, they are not so to Netflix’s average consumer–to the vast majority of the recipients of those emails. Each of Hastings’s communications suffers from a severe case of TMI, alternating from melodrama to dry business speak. At one point he’s speaking of his “greatest fears”; moments later he’s talking about how DVDs and streaming have “very different cost structures,” as though he were delivering a report on quarterly earnings (or losses–Netflix shares have plummeted precipitously since July). Hastings’s messages have been part Woody Allenish neurosis, part dry economics documentary–and just about everyone in the audience has felt the impulse to walk out.

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How Netflix Lost 800,000 Members, and Good Will

By Nick Wingfield and Brian Stelter

  • Oct. 24, 2011

Reed Hastings was soaking in a hot tub with a friend last month when he shared a secret: his company, Netflix, was about to announce a plan to divide its movie rental service into two — one offering streaming movies over the Internet, the other offering old-fashioned DVDs in the mail.

“That is awful,” the friend, who was also a Netflix subscriber, told him under a starry sky in the Bay Area, according to Mr. Hastings. “I don’t want to deal with two accounts.”

Mr. Hastings ignored the warning, believing that chief executives should generally discount what their friends say.

He has since regretted it. Subscribers revolted and many dropped the service. The plan further tarnished a once widely respected Internet service that had already been wounded by an unpopular price increase in the summer. Mr. Hastings was forced to reverse the planned split — but not the price increase — three weeks later and apologized .

On Monday, the company revealed the damage that had been done. It told investors that it ended the third quarter of the year with 800,000 fewer subscribers in the United States than in the previous quarter, its first decline in years. The stock plummeted more than 25 percent in after-hours trading. [In regular trading Tuesday, the stock fell more than 30 percent.]

Despite the decline in subscribers, the company did well financially in the quarter . It reported net income of $62.5 million, or $1.16, a share, compared with $38 million, or 70 cents a share, in the year-earlier quarter. Revenue rose 49 percent to $822 million. Both revenue and income topped analysts’ expectations.

netflix and qwikster case study

Like many other companies built in Silicon Valley, Netflix prides itself on its analytical, data-driven approach to making decisions. But it made a classic business misstep. In its reliance on data and long-term strategy, the company underestimated the unquantifiable emotions of subscribers who still want those little red envelopes, even if they forget to ever watch the DVDs inside.

Mr. Hastings said in an interview last week, his most detailed discussion yet of the bruising period, that he had been guilty of overconfidence and of “moving too quickly.” But he said he still believed — as do nearly all investors and analysts — that Netflix’s future lay not in DVDs but in streaming over the Internet. “We still need to move quickly in streaming,” he said.

Twice in the interview, Mr. Hastings linked the hostility toward Netflix’s price change and proposed breakup to the angry mood of the country, even citing the Tea Party and the Occupy Wall Street movement by name.

He said — and repeated it on a conference call for investors on Monday evening — that subscribers had been bothered more by the summer price shock than by the breakup plan. Until September, a combination of video streams and DVDs cost as little as $10 a month; now, that same package costs $16. “We are done with pricing changes,” Netflix said Monday in a letter to shareholders.

Mr. Hastings said he was not sure whether the plan to split the company had been presented to customer focus groups before it was made public. Mr. Hastings said he assumed it had been. But he said he did not recall what those focus groups had said about the plan.

He said Netflix was now trying to slow its decision-making to ensure that there was more room for debate about major changes at the company.

How Netflix came to be so out of touch with its customers is a cautionary tale for other companies that try to transform to new media from old. As the company’s streaming Internet service caught on with consumers, subscriber numbers soared and, with them, the company’s stock, rising ninefold from the start of 2009 to peak above $300 in July.

Last year, Fortune magazine put Mr. Hastings, 51, on its cover as the businessperson of the year after he seemed to pull off the rare feat of finessing the “innovator’s dilemma” by navigating Netflix to the digital future from its DVD rental business.

A key to its success was the way it blended its new and legacy businesses. While the library of material available for streaming was relatively sparse because of Hollywood licensing restrictions, Netflix customers could find many of those missing movies, especially new releases, in the company’s far larger DVD selection.

But Netflix needed to spend more money to license additional material for its streaming service. Collecting $10 a month from subscribers was insufficient as costs ballooned. Mr. Hastings defended the increase last week and again on Monday, but he said it was “too big a price change all at once.” Hubris played a big role in the errors, he said.

For well over a year, all the signs seemed to indicate to Netflix that customers were ready to move quickly to a future in which movies and TV shows would come to them instantly over the Internet instead of in the mail. Mr. Hastings said the decision to form Qwikster, as the mailed DVD company was to be called, had been based in part on data that showed a faster-than-anticipated increase in streaming by its customers.

In the first quarter of this year, for the first time, DVD shipments were down year over year, leading Netflix to declare that the DVD business had peaked. “Very few” new subscribers were choosing to get DVDs in the mail, Mr. Hastings said.

Stuart Skorman, a Bay Area entrepreneur who previously ran a chain of movie rental stores and an Internet movie venture, last year worked with Netflix managers after licensing to the company a database of movie recommendations. He said he was struck at that time by how little Netflix seemed to care about its DVD rental business.

“I think they should have been paying much more attention to it because that was their customer base,” he said. “That’s what made them special.”

Steve Swasey, a Netflix spokesman, disputed the idea that the company did not care about its DVD business, saying it was still acquiring discs for the service and was focused on speedy delivery of movies. 

The breakup announcement in September seemed “very data-driven,” said Rich Greenfield, a media analyst for BTIG Research. “I think the company thought, because many people aren’t watching the DVDs, let’s accelerate the transition.”

What the company seemed not to respect was the premium that consumers place on having options — even if they don’t actually take advantage of all those options. Just ask any all-you-can-eat buffet operator, or a gym owner who sells six-month memberships.

Netflix’s red envelopes “were basically occupying slots in between the couch cushions for long periods of time,” Mr. Greenfield said. “But even if there wasn’t usage of the DVDs, there was a perception of value.”

Mr. Hastings said he expected that the DVD-by-mail business would “last a long time.” He identified two long-term markets for it: rural customers who cannot or do not have broadband Internet access for streaming, and “film school types” who want a comprehensive catalog of old films.

The scrapped plan to form Qwikster has led to speculation among analysts and executives, like Mr. Skorman, that Mr. Hastings wants to sell Netflix. While Netflix beat big rivals in the DVD rental business, like Blockbuster and Wal-Mart, it faces an increasing phalanx of formidable players in streaming movies, like Apple, Amazon and Hulu.

Mr. Hastings denied he had any such plans. “Mercenary C.E.O.’s are always preparing for a sale, and missionary ones are always preparing for the long term,” he said. “I’m clearly in the latter camp.”

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The Two-Way

The Two-Way

Netflix kills qwikster; price hike lives on.

Bill Chappell

netflix and qwikster case study

Netflix has backed off its unpopular plan to split its service into two offerings — one for streaming video, and one for sending DVDs by mail. CEO Reed Hastings is seen gesturing in this file photo.

Bowing to customers' anger and confusion over its move to divide its streaming and DVD video offerings, Netflix is reversing itself, snuffing the plan to offer DVDs by mail via a new service called "Qwikster." News of the backpedaling move was published on the company's blog early Monday.

Netflix had announced the separation in July , when it also outlined a price increase for customers who prefer to watch videos on the company's streaming service as well as receive DVDs by mail. The base price for the two combined services effectively went up from $10 to $16 — a rate hike that remains in place.

The decision to split the services was wildly unpopular among Netflix subscribers. Reacting to the announcement on Facebook, a customer named Willie Williams summed it up in a way that 1,877 people agreed with:

Individually your DVD and steaming services do not offer enough to justify their expense. As a bundled service they supplement each other and provide the value that made Netflix wonderful. DVDs allowed you to view newer releases in a fairly timely manner. Streaming allowed for viewing of the older catalog of movies that come up when you think of it but might not be worth waiting for to arrive in the mail.... By separating these services I fear you are weakening Netflix as a service and subsequently the brand. Together these services made Netflix a success, separated you lack the availability and pricing of your competitors.

For whatever reason, those insights were not available in the offices of Netflix — and when the company said it would be branding the new DVD service as Qwikster, the plan was met with derision . Within days, the term "Qwikster" began to sound like the 2010 word for "New Coke" — Coca-Cola's ill-fated replacement for its flagship product.

If you're curious about similar corporate missteps — like Crystal Pepsi, or Apple's "Lisa" computer — you can see a short list, and view vintage TV ads, at the Grow Think website . And here at NPR, we created this slideshow of bold, and in some cases misguided, attempts at "re-branding":

2011: Facebook Insitutes New Round Of Changes To User Pages. The changes included a real-time ticker and new ways to personalize your page. The Facebook blog says of the changes, the "News feed will act more like your own personal newspaper." The company also announced new partnerships for music, movies and TV. You'll be able to see which movies and TV your friends are watching, what mus...

Netflix customers greeted the "Qwikster" news by keeping their promises to cancel their memberships altogether, turning to rival video streaming services from Amazon, Hulu and others. And by the time the mid-September switch arrived, Netflix announced that it had lost an estimated 1 million subscribers.

Two attempts at mitigating the damage — an admission by CEO Reed Hastings that Netflix had failed to communicate the changes well, and the renaming of its DVD-by-mail service as Qwikster — failed to appease customers.

And less than 1 month after the new plans were instituted, Hastings announced that Netflix would abandon the plan to separate, in a blog post that read, in part:

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.

While that news is sure to make some customers happy, the new prices that were announced in July will remain in effect. Monday, Hastings reiterated that the price hike of as much as 60 percent was "necessary."

netflix and qwikster case study

A screenshot shows Qwikster.com, the ill-fated DVD mailing service that Netflix discontinued Monday.

In addition to the loss of subscribers, Netflix has seen its shares lose more than half their value since July. After news spread Monday that Qwikster would soon be part of Netflix's past, the stock "rose $8.63, or 7.4 percent, to $125.84 in morning trading after rising as high as $128.50," according to the AP.

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All tech considered, change: part of a proud corporate tradition.

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Netflix and Qwikster

Cooked, document.

In 2011, Netflix announced changes that observers characterized as among the greatest missteps in the history of corporate strategy. First, the company significantly raised prices. Then, Reed Hastings, the founder and CEO of Netflix, described plans to split the company between streaming and disc rental, spinning off the DVD-rental business to a new entity called Qwikster. The outrage from customers and investors was extreme. Within two weeks, Hastings reversed the plan to split the company (though maintaining the price increases). During the debacle, Netflix lost 2 million subscribers and the stock dropped more than 75 percent in value.

Before his controversial move to split the company, Reed Hastings had built a reputation as a savvy businessman. He founded Netflix in 1998 as a DVD rental business, which allowed subscribers to order discs online and then receive and return the DVDs through the mail. By the end of 2010, Netflix had grown to 20 million subscribers, gained revenues of over $2.1 billion, and delivered net income of $160 million. The company had crushed its bricks and mortar competitors in DVD rental. Other competitors that had tried to mimic Netflix’s net and mail service had failed to find subscribers and had similarly fallen by the wayside.

In addition to its success with DVDs, Netflix had established a growing online video-on-demand service. Hastings believed internet streaming would be the future of content delivery and increasingly described Netflix as "a streaming company, which also offers DVD-by-mail." Many investors seemed convinced – by early July 2011 the stock price had reached $304, giving Netflix a market capitalization of over $16 billion.

But then came Hastings’s disastrous decision and its reversal. In the year since, Netflix had not managed to convince investors that it knew the way forward. Observers noted that the company was attempting to compete in two fundamentally different businesses with the same list of subscribers. While the company was the leader in the physical rental of DVDs, the streaming video space was becoming more crowded, and Netflix’s success hardly seemed assured. Could Hastings find some way to leverage success in one type of business to overcome the obstacles in another?

Published Date: 15/08/2012

Suggested Citation: Sharon M. Oster, M. Keith Chen and Jean W. Rosenthal, "Netflix and Qwikster," Yale SOM Case 12-019, August 15, 2012.

Keywords: United States, Media, Distribution, Streaming Services

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The New York Times

Media decoder | netflix, in reversal, will keep its services together.

Media Decoder - Behind the Scenes, Between the Lines

Netflix, in Reversal, Will Keep Its Services Together

Netflix backtracks.

Netflix changed course and decided not to split up its online streaming and DVD services.

7:19 p.m. | Updated

The New Coke experiment lasted less than three months. Qwikster did not even make it out of the bottle.

In a swift reversal, Netflix said Monday that it had decided to keep its DVD-by-mail and online streaming services together under one name and one Web site, abandoning the breakup it had announced three weeks earlier.

The company, which will keep a recent 60 percent price increase in place, declared that it had moved too fast when it tried to spin-off the old-fashioned DVD service into a new company called Qwikster, angering many subscribers. “We underestimated the appeal of the single Web site and a single service,” Steve Swasey, a Netflix spokesman, said in an interview, before quickly adding: “We greatly underestimated it.”

Some reacted on Monday by teasing Netflix and its chief executive, Reed Hastings, for being topsy-turvy, but many praised the company for, as Ingrid Chung of Goldman Sachs put it in an analysts’ note, “listening to its customers (finally) and working to fix its relationship” with them. On Monday morning, Netflix e-mailed people who recently canceled their accounts to tell them about the reversal.

Maybe, some said, after a season of spectacular missteps, Netflix has finally figured out how to communicate effectively about its future. Or maybe now the company is just saying what its subscribers want to hear — that those who want both online streams and DVDs won’t have to manage two accounts and pay two bills each month, after all.

Netflix stock, which has lost almost two-thirds of its value in the last three months, rose on the news on Monday morning, but declined in the afternoon, closing down 4.8 percent at $111.62.

Richard Greenfield, a media analyst for BTIG Capital, said in an e-mail message that Monday’s announcement was the “necessary reversal of a bad decision.”

“The key remaining question,” he said, “is ‘Why did they make the Qwikster decision in the first place?’ ”

Netflix said it never actually separated the services or started Qwikster. But the planned breakup was rooted in Mr. Hastings’ belief that DVDs and online streams have different cost structures and different consumer demographics.

In July, to address the structural underpinnings of the business, he announced that the company would start charging $8 a month for both its streaming service and its DVD service, a total of $16 a month for the combination. Previously, DVDs were a $2 add-on to the $8 streaming service. Of course, subscribers who only wanted one service or the other — most new subscribers only want the online streams — saw no price hike , but that fact was drowned out by the outcry.

Netflix expected some of its 25 million subscribers to cancel in the wake of the price change, but the cancellation rate exceeded expectations. The company said on Sept. 15 that it expected to report a quarterly decline of about one million in the third quarter, which ended on Sept. 30.

Still, it pressed forward, announcing the breakup plan the night of Sept. 17. “Companies rarely die from moving too fast, and they frequently die from moving too slowly,” Mr. Hastings wrote in a blog post that night. His implication then was that Netflix had to act aggressively to expand its fast-growing streaming service by severing its older, slower DVD-by-mail arm.

In a sentence that now seems like a bit of foreshadowing, Mr. Hastings also wrote, “It is possible we are moving too fast — it is hard to say.”

Tens of thousands spoke out against the plan on Netflix’s Web site and others, and Netflix stock slid sharply. Three days after the announcement, Mr. Hastings wrote in a Facebook status update, “In Wyoming with 10 investors at a ranch/retreat. I think I might need a food taster. I can hardly blame them.”

Then came the flip-flop, announced Monday. Mr. Hastings declined interview requests, but he said in a statement 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.”

Mr. Swasey declined to comment on any involvement by the Netflix board in the decision to keep the two services together.

Some of the details of the reversal are still being deduced. Netflix’s plan for Qwikster to rent video games may or may not move forward; Mr. Swasey said that it was “to be determined.”

On Netflix’s blog on Monday, some subscribers called for Mr. Hastings’ ouster, but others called him courageous for owning up to his mistakes. Wrote Sean Michael McCord, a systems engineer, “I was ready to call the whole thing ‘Quitster’ for me, but now I may just stick around for awhile longer.”

Some analysts suspect that Netflix’s third-quarter losses exceeded the company’s already-lowered expectations, but the company declined to comment Monday. It will report earnings and subscriber figures on Oct. 24.

Despite the turnaround, online streaming remains the core business for Netflix going forward. A lack of compelling films and TV shows on the streaming service is a frequent lament, and it is likely to grow louder next winter: that’s when Sony and Disney films are expected to be removed, the result of a failed negotiation with Starz.

But Netflix is trying to stock up on more streaming content; last month it announced a deal with DreamWorks Animation to stream that studio’s films starting in 2013, and last week it announced a deal with AMC Networks to stream old episodes of TV shows like “The Walking Dead.” The company also remains interested in paying for the production of new TV shows. Earlier this year it ordered its first original drama, “House of Cards,” which is expected to have its premiere in late 2012.

It is now in talks to distribute new episodes of two canceled TV series, “Arrested Development,” formerly of the Fox network, and “Reno 911,” formerly of Comedy Central . The past seasons of both shows can be streamed via Netflix — and can be rented on DVD, too.

What's Next

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COMMENTS

  1. A Split Decision: The Critical Analysis of Netflix’s...

    After a great deal of media attention and several professional and amateur videos released by Netflix executives, the Netflix team settled the public uproar by announcing that they were no longer pursuing their plans with Qwikster.

  2. Sage Business Cases - Netflix and Qwikster: Would Success in ...

    First, the company significantly raised prices. Then, Reed Hastings, the founder and CEO of Netflix, described plans to split the company between streaming and disc rental, spinning off the DVD-rental business to a new entity called Qwikster. The outrage from customers and investors was extreme.

  3. Netflix’s Bold Disruptive Innovation - Harvard Business Review

    Netflix’s announcement that it is splitting off its DVD-by-mail business from its streaming business is just such an experiment. The DVD business will now go by the name Qwikster, and the ...

  4. Netflix at 20: Let's revisit the failure of Qwikster - Quartz

    The online-video service, which started out renting DVDs by mail, was three years into experimenting with on-demand streaming and CEO Reed Hastings knew it was the future.

  5. Navigating Change and Adversity: A Case Study of Netflix’s ...

    On March 14, 2022, Netflix’s shares were down to more than 50% by losing all its pandemic gains. Investors have faced the biggest loss; even big companies have withdrawn their shares from Netflix. The founders of Netflix, led by Reed Hastings and pioneered by Marc Randolph, were in trouble.

  6. Netflix’s Qwikster Debacle | MIT Technology Review

    Rather, the main problem was Netflix’s handling of the changes–the garbled emails sent by Hastings, the poor timing, and the overall sense of indecision hanging over the whole affair. Here are...

  7. Netflix Lost 800,000 Members With Price Rise and Qwikster ...

    Reed Hastings was soaking in a hot tub with a friend last month when he shared a secret: his company, Netflix, was about to announce a plan to divide its movie rental service into two — one...

  8. Netflix Scuttles Its 'Qwikster' DVD Rental Plan - NPR

    Netflix customers greeted the "Qwikster" news by keeping their promises to cancel their memberships altogether, turning to rival video streaming services from Amazon, Hulu and others.

  9. Netflix and Qwikster – Yale Management Media

    First, the company significantly raised prices. Then, Reed Hastings, the founder and CEO of Netflix, described plans to split the company between streaming and disc rental, spinning off the DVD-rental business to a new entity called Qwikster. The outrage from customers and investors was extreme.

  10. Netflix, in Reversal, Will Keep Its Services Together

    In a swift reversal, Netflix said Monday that it had decided to keep its DVD-by-mail and online streaming services together under one name and one Web site, abandoning the breakup it had...