Netflix wrestles with innovator's dilemma; Customers pan 'Qwikstupid' idea

Netflix wrestles with innovator's dilemma; Customers pan 'Qwikstupid' idea

Summary: Netflix CEO Reed Hastings apologizes to customers and renames the company's DVD by mail service Quikster. Chaos ensues.

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Netflix apologized to customers for mishandling its pricing changes and attempted to slice off it DVD business under the rebranded moniker Qwikster.

Despite the best laid plans of the company’s business strategy consultants, the early customer reaction can be summed up in one word: blowback. Customers have a right to ask a few questions. What consultant cooked up this strategy?

Netflix CEO Reed Hastings delivers quite a mixed bag in his mea culpa blog post to customers. The upshot goes like this:

  • Netflix lacked "respect and humility in the way we announced the separation of DVD and streaming, and the price changes."
  • Hastings' biggest fear is that the company couldn't transition from DVD delivery to streaming movies. Hastings is worried about the innovators dilemma. He said:

Most companies that are great at something – like AOL dialup or Borders bookstores – do not become great at new things people want (streaming for us) because they are afraid to hurt their initial business. Eventually these companies realize their error of not focusing enough on the new thing, and then the company fights desperately and hopelessly to recover.

  • To manage this dilemma, Netflix is separating its DVD by mail service into something called Qwikster. Netflix is the streaming brand and Qwikster is the DVD by mail service. Both will be improved, said Hastings, who added that Qwikster will include video games.

Both Netflix and Qwikster will "work hard to regain your trust," said Hastings, who said the current pricing changes stick.

Netflix's moves raise more questions than they really answer. Among the key issues:

  1. Does this Qwikster spin-off really amount to anything more than a quarantine of a business Netflix wants dead? Customers quickly pounced on the possibility that two sites complicate matters.
  2. Can Netflix's streaming service really carry the company? The content library for Netflix's streaming service is lacking. Losing Starz doesn't help either.
  3. Is a name change and business separation really the best way to handle an innovator's dilemma? It's hard to believe that these services will be separate but equal and innovate individually.

Also: CNET: Netflix CEO's apology brings new backlash

Customer reaction brutal

Netflix customers called Hastings out on the master plan, which comes just a few days after the company said its subscriber totals will fall short of estimates. Few were buying it. A sampling from the reaction to Hastings blog post:

This just further encourages me to drop one of the services (or both). Without integrating the two services, it makes things much more difficult for customers who'd like both DVDs and streaming. We'll no longer be able to see when the DVDs in our queue are available on streaming, so that's a huge detriment, in my opinion. Also, it's obvious that the movie distribution companies are not fans of your streaming service, considering the huge accounts you've recently lost. So with this loss of content, your price change and your split of the services, you're now offering less for more. I still fail to see how any of this is a benefit to customers, though you are desperately trying to spin it that way, understandably. It's purely to make money by streaming (don't have to pay for that costly shipping or storing inventory or paying employees to perform the shipping). And I wouldn't be at all surprised if this "Qwikster," (really? sounds like Friendster, and we all know how well that did) ends up sold off elsewhere, probably again to the detriment of the customers. Maybe streaming really is the way of the future, but until your content improves, none of your changes have been worth the additional cost or pains in the ass to customers. I haven't heard one good word about Netflix since the price change announcement; all customers are less happy these days. Luckily, you still have more DVDs than Blockbuster, or even more customers (including me) would be long gone.

And.

Reed Hastings I'm going to take a slightly different tactic and leave the Netflix/Qwikster thing alone. Instead I wanted to touch on your comments about focusing on and building out the technology for the (now) Netflix streaming service. No one I've talked to has complained about the streaming technology in the Netflix DVD/Streaming split. What I hear from those people who love Netflix streaming is "I'm not interested in paying more for service when the content on streaming is abysmal and MUST be supplemented with DVDs by mail". As an engineer, the tech is always fun to build and streamline, but Netflix will live and die by its content, not marginal improvements to its underlying streaming technology.

And.

RIP Netflix & Qwikstupid or whatever it's called. Seriously...are you guys making an attempt at being the hipsters of usability? Making no sense and just flat out looking dumb to people around you? The price hike didn't bother me that much as I was already on a 3 DVD plan and my rates didn't go up as much as others on 1 DVD plans. Now you guys want to make things more annoying to use. I'm pretty sure it will be more convenient to throw my money at Apple & Amazon and have a much better usability experience. Sure, my recommendations may suffer a bit, but as it is, my kids streaming Hannah Montana reruns has pretty much screwed those.

And.

You're continuing to make a classic mistake: thinking you're something different than what everyone believes you are. You're not a DVD company and a streaming company: you're where I go to watch movies. That's it. The future clearly is streaming, but by separating and charging more for access, you're wildly less valuable to me. I'll likely cancel. You haven't listened to customer feedback. You're delusional and you're lost.

Related:

CNET: Netflix CEO's apology brings new backlash

Topics: Mobility, Hardware

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94 comments
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  • RE: Netflix wrestles with innovator's dilemma; Customers pan 'Qwikstupid' idea

    look at the stock price. +2.5% today. S&P -2%.

    He did this move for the hedge funds. I wouldn't be surprised if they were the ones who gave him the choice - separate or we well sell you.
    Bodazapha
    • RE: Netflix wrestles with innovator's dilemma; Customers pan 'Qwikstupid' idea

      @Bodazapha

      Uh.. look again! Down $2.65 at 12:50PM...

      I like the synergy between streaming and mailed DVDs since streaming has little overall content, especially in the area of movies. Maybe they want to get out of the DVD end of the business, but they do it at their peril. DVDs will be around for a very long time. Streaming will get better, but until it has the same content as DVD, there'll still be an audience for the latter.
      thesuperstitions@...
      • but that doesn't change the fact that the DVD rental..

        @thesuperstitions@... part of the business is less profitable.. WAY less profitable.. streaming even today with its less content is still more profitable and desirable business to be in... <br><br>people desire a lot of things it doesn't mean there is profit in it.. that you should make a business out of it or continue to run a business around that desire.. something tells me that Netflix has run the number and realized that staying in the optical media rental business is incredibly foolish.. look at how fast and harshly they separated the business.. optical media rentals TODAY, from a financial stand point just doesn't make financial sense or cents.. the only thing they did wrong was alienating renters who are potential streaming customers.. other than that they are right on the money on this one..
        doctorSpoc
    • Hastings sold 175,000 shares ($40 million) of Netflix this year

      That doesn't inspire confidence when the CEO doesn't even believe his company will do better (stock will raise).
      SonofChef
      • Context

        @SonofChef

        What percentage of his total was it? CEO's selling doesn't mean much without context.

        CEOs don't like putting all their eggs in one basket either and occasionally enjoy spending some of all that money they theoretically have.
        SlithyTove
      • Wrong. misguided FUD.

        @SonofChef

        First, read this interesting article... Hastins has always bought/sold his stock in NFLX, to make up the majority of his compensation via options. [i]As he only draws $1 million/year in 'salary'[/i]
        http://www.siliconbeat.com/2010/09/22/netflix-ceo-reed-hastings-reaping-benefits-of-soaring-stock/

        Second, on a 5 year line, NFLX has risen 600% ...up 1200% at one point... I don't imagine many investors need reassurance.
        UrNotPayingAttention
    • guys.. this actually makes all kinds of sense on just about every level..

      @Bodazapha DVD rental business is a) dying, b) is WAY lower margin, lower profit than streaming.. putting DVDs in the mail, dealing with scratched and damaged DVD, DVD that don't come back, rising shipping cost etc, etc.. WHY?? when there is comparatively no money in it.. AND it's dying.. makes no sense!<br><br>Neflix is RIGHTLY weening people off of this incredibly antiquated method of content delivery.. they were right to realize that they needed to get out of optical media rentals, but were way to harsh in dealing with optical media renters because they DO want them to be streaming customers so they shouldn't alienate them.. but the are correct in making it harder and less convenient for these renters to rent optical media because the faster they can get them off of renting and on to streaming the better and the more money they will make for their share holders.. <br><br>hard to take for some if you're a optical media renter but the reality is that.. Netflix doesn't really give a rat's behind about you because you don't make them enough money to warrant caring about.. you're living in the past and they are trying to gently (now) nudge you into the present future.. notice the streaming service is still called Netflix and the optical media rental service is "Quickster".. i'm sure if they could find a buyer for this low margin, low profit business they would sell it in a heart beat..
      doctorSpoc
      • RE: Netflix wrestles with innovator's dilemma; Customers pan 'Qwikstupid' idea

        @doctorSpoc : Actually part of their brain damaged DVD business is paying for the media to be returned, sorted & cataloged, etc. If they would just realize the media can be disposable, their costs could be cut drastically.
        Willnott
      • Except one leve

        @doctorSpoc

        Only problem is that they are jumping the gun. Their streaming offering is still too content poor to stand on it's own.
        SlithyTove
      • but, they have looked at the numbers.. you haven't..

        @SlithyTove.. by their actions it must be incredibly, painfully obvious that the optical media rental business needs to be put out to pasture TODAY because it's dragging down the streaming business.<br><br>there is no question that the optical media rental business is still popular today.. the question is are people willing to pay the real price for that service to make it worthwhile for Netflix to be in that business.. and in the face of the streaming business? basically the oportunity cost of running the optical media rentals is too great.. they have obviously run the number and realized that even today with streaming still in it infancy it's the business they need to concentrate on and grow.. people need to get transitioned as fast as possible.. they don't need the draw of rentals any longer.. even at this point in the game..
        doctorSpoc
      • RE: Netflix wrestles with innovator's dilemma; Customers pan 'Qwikstupid' idea

        @doctorSpoc
        There are still millions of people who have a very marginal Internet connection and there others who have no Internet connection at all other than dial-up. For those people, streaming video is just not an option. Even for those people who live in big cities with an excellent Internet connection, streaming video is a no go, unless the content of both DVDs and streaming are equal in quality and quantity. The quality difference is especially striking when watching a movie from a high quality Blu-ray disc directly or streamed over the Internet where the video. Is highly compressed. Streaming is not going to be that cheap either, as more ISPs implement data caps and tiered service. Only Netflix won't be paying that, but their customers.

        Our Internet connection here is very slow, so that as soon as someone else in the house starts downloading something while a movie is playing, the video quality suffers dramatically or even stops entirely. I guess the folks at Netflix, with dollar signs in their eyes, are not able to see what a significant fraction of their customers really want.
        arminw
      • You're right. Haven't looked at the numbers

        @doctorSpoc

        Just the service from the perspective of a consumer.

        What Netflix used to mean was a vast, convenient library superior to the store experience, some of which was occasionally available through the even more convenient streaming.

        Without the DVD business, Netflix is sort of the Golden Oldies station of movies. The best of the 60, 70s, and 80s!

        Bailing before they have the content in place risks torpedoing the brand and sending people into the waiting arms of competing services. The timing is particularly bad, as they are losing Starz which was one of their only access points to big new titles.

        Also, streaming is more profitable right now because the content is weak and thus costs are low. To prevent exodus they have to strengthen that content. Which will cost money and lots of it. Controlling and projecting that cost will be much more difficult than the DVD business was since it will be at the whim of capricious studios.

        So they are moving from a predictable cost business to a wildly unpredictable cost business. And based on the low amount they charge they will either have trouble securing content or have trouble securing profit.
        SlithyTove
      • RE: Netflix wrestles with innovator's dilemma; Customers pan 'Qwikstupid' idea

        @doctorSpoc
        Your logic is sound but it is out of sync with the reality today. Their streaming is content is poor and with Star falling off at the end of the year will be even worse. They need the core client base to survive and drive the move to streaming. The price increase was something I could live with because I saw it as a way to get better content on streaming. What do I get instead. Poorer streaming content, the hassle of having to deal with two separate companies and a CEO who has no idea what his customers want. Netflix was a shooting start that I really thought was worth the money - easy to use, two ways to view content and getting better every day. I could rent the movies I wanted to see in DVD quality and stream the others. Now it is a complete train wreak, they need to fire that imbecile of a CEO and bring in someone who can make them money while giving the customer what they want.
        KBabcock75
      • i don't disagree with anything that you are saying...

        @arminw ..but that's not Netflix's problem.. they are in business to make money.. delivering physical media to people's houses is expensive, making the margins for that business very tight.. and Netflix is not interested in participating it any more.. I'm sure they would like to transition as many of those people as possible to streaming but.. they don't need those people anymore to make good profit.. millions of customers all contributing a tiny portion of profits to the pot is just a distraction from growing the profitable part of the business that actually has a future.. obviously a tipping point has been reached.. when you stop selling horse shoes and put everything into tires?

        and blueRay has been a big fail.. bottom line.. people just don't care.. and at normal viewing distances people can't tell the damn difference up-sampled DVD or even not even up-sampled DVD.. and blueRay and even if they can.. they just don't care.. convenience counts more than some tiny amount quality.. i can actually tell the difference so i'm not saying there isn't a difference.. but look at the blueRay adoption numbers.. no on cares except tech heads like you and me..
        doctorSpoc
      • RE: Netflix wrestles with innovator's dilemma; Customers pan 'Qwikstupid' idea

        @arminw : the thing you have to realize is that netflix is not a public service. they are in no way required to provide you with streaming or dvd content. if it costs too much to get you content so that they aren't profitable, then you are not a customer that they are going to pursue. it sucks, but i'm in the same boat. can't even get cable where i am let alone high speed unlimited access.
        jaker8
      • RE: Netflix wrestles with innovator's dilemma; Customers pan 'Qwikstupid' idea

        @doctorSpoc This is not weening or a nudge, this is a push off the cliff. We steam the vast majority of our stuff from Netflix, but they still do not have all the content I would like streaming. We get maybe 4 discs a month, but that is a nice bonus that brought us to Netflix in the first place.

        What these radical changes have done to me is turned me into that guy that will jump ship pretty quickly if someone else offers a similar type of deal. I already use a ton of content from Amazon, Google, and Itunes, so if they can begin to deliver in the same way (i.e. a Wii channel and similar or better content), why not go with them instead of keeping Netflix.
        littlemas2
      • Content

        @doctorSpoc

        I haven't looked at the numbers. As a customer I look to the content.

        Streaming was a nice bonus to the DVD rental scheme. On it's own.....

        With this move Netflix goes from a household name that represents huge selection and best of breed to being the Oldies Station of TV. The best of the 60s, 70, and 80s! When my gf and I use the streaming video we spend more time finding something to watch than we do watching it

        If the don't get a LOT more content out there and soon, they risk torpedoing the brand entirely. Unfortunately, part of the reason streaming is more lucrative for them is because it is currently so content poor. Increasing content will increase their costs and drop their profit on streaming.

        Worse, they are jettisoning a model where the could control and predict cost for one where their costs are at the whim of big media corps that would just as soon see Netflix go bankrupt and die.

        I hope they do get streaming sorted out, but it sure does look like brand seppuku.
        SlithyTove
    • RE: Netflix wrestles with innovator's dilemma; Customers pan 'Qwikstupid' idea

      @Bodazapha : Just goes to show that Wall St. has no concept of business or customer relations. Just about every dumb move made by companies recently has been applauded by Wall St. What's wrong with that picture??? Moral: Never use Wall St. as a barometer for business or economic health - they consistently get it wrong, because they are too self-interested.
      Willnott
  • It's all about CONTENT

    And Netflix has none of their own and are at the mercy of content owners. Netflix has no choice but to do as the content owners dictate.
    NoAxToGrind
    • No excuse for being stupid though

      @NoAxToGrind All these MBA's and this is the best they could come up with?

      How about enticing your current base to move to streaming by allowing a limited amount of streaming with ALL DVD plans?
      otaddy