Netflix's mea culpa disaster: 'Seems like a panic move'

Netflix's apology to customers went over like a lead balloon. Analysts say Netflix looks like it's panicking over backlash to pricing changes.
Written by Larry Dignan, Contributor

Netflix CEO Reed Hastings issues a mea culpa to customers and continues to be pounded over the head with it.

Late Sunday, Hastings delivered his apology and said that it will separate its DVD by mail service under the Qwikster moniker. The move was panned by widely panned by customers.

As analysts handicap the move, the consensus appears to be that Hastings and Netflix panicked after losing DVD customers and facing a backlash to its pricing changes. Indeed, a Frank N. Magid Associates survey found that 30 percent of customers are planning or at least pondering a Netflix exodus. Consider Netflix's week so far:

Morningstar analyst Michael Corty said that Netflix looks like it clearly panicked.

Netflix sent a letter to customers announcing a formal split of the DVD and streaming video business. At first glance, this seems like a panic move by the company. The DVD business will be named Qwikster and have a separate website; customers who receive both DVDs and streaming will get two separate bills. The Qwikster service will also have a subscription tier that allows customers to access video game titles in addition to video content. By highlighting the two separate charges on credit card statements, ironically, more subscribers could opt to drop the plan that delivers the least value.

Indeed, Wall Street is still panning the stock. Here's the 6-month view:

Corty said:

We've never really understood the company's decision to demarcate the DVD and streaming business in the first place. There is room to invest in the streaming business and use DVDs to keep customers satisfied at the same time. We think the July price increase was necessary to help Netflix invest more in the streaming business, but it was a mistake to not offer a discounted price to customers taking both DVDs and streaming.

In other words, Netflix compounded a discount pricing blunder with a lame apology and a DVD business separation. Hudson Square analyst Daniel Ernst said:

Under a single company serving customers through a common portal, we believe Netflix has a better chance of cross selling the two services. Should a DVD only customer put a movie on his/her queue that is also available digitally, Netflix can suggest the “watch now” option, tempting the customer to upgrade his/her account. Similarly, should a streaming only customer wish to view a program not yet available through digital rights, Netflix can alert the customer to the availability of the disc on the DVD service. Under the separation plan we see this ability to cross sell and convert as greatly reduced.

The big question among analysts is whether the worst is over for Netflix. Short answer: Possibly. Piper Jaffray analyst Michael Olson said a sale of Hulu could be worrisome to Netflix.

One piece of negative news that could emerge in the coming weeks would be the sale of Hulu to a Netflix competitor. Despite the fact that it has been discussed in the media, if Amazon or Google purchases Hulu, shares of Netflix would likely respond negatively.

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