The online buzz this week has been about Netflix splitting their DVD business into a separate entity they are calling Qwikster, while retaining the streaming business via the Netflix brand.  Presumably this means customers will have to manage separate queues for their DVD and streaming consumption.   Many in the tech media saw the move as Netflix pushing consumers from expensive-to-manage physical DVDs to more cost efficient streaming.

The miscalculation Netflix made is that consumers’ viewing habits are still a hybrid of physical DVD and streaming media.  This is primarily a function of the nature of the business—viewing windows mean content creators provide exclusive viewing rights for license holders such as HBO and others so that the available library on streaming is a fraction of DVD.  Physical DVDs, on the other hand, are the property of the owner of the DVD and they are free to rent as they see fit.  The result is that Netflix’s physical library is estimated at 200,000 while their streaming library is about one-fifth of that at a mere 40,000.

The result of the decision to split the two businesses is that consumers’ ability to cater to their natural viewing habits (physical-streaming hybrid) has been relegated to the realm of ‘highly annoying’.  Set up two separate accounts, log into two websites , manage two queues to figure out what I’m going to watch?  Thanks but no thanks.  The customer response has been overwhelming.  As of this writing the blog post announcing the change has received nearly 25,806 responses, the majority of which are negative.



How Did We End Up Here?

So how did this happen?  How did Netflix stumble so badly? How is it that such a huge percentage of good content is not available via streaming and yet Netflix saw fit to break apart streaming and DVD thus making it far more difficult for the customer?

There are many lessons to be learned in this debacle (including securing your social media presence prior to launching a new brand) but the chief lesson and reason Netflix stumbled so badly is because they took their eye off the customer.  The sequence of events felt rushed (perhaps explains the social media oversight) and came on the heels of the loss of significant value from their stock.  Presumably Netflix felt significant pressure from the street and they made a decision that negatively impacted their customers in a significant way.  Whatever the reason for the decision, had Netflix kept their eye on the customer and viewed the changes through their customers’ eyes they would never have made it. (And why a consumer brand should never, ever make a customer impacting decision based on what the street wants).

The decision is particularly perplexing because Netflix has traditionally been such a customer centric brand. They have famously preemptively credited customers for even the shortest of service outages. This makes me believe that the decision was made under some kind of pressure that diverted Netflix from their traditionally customer focused approach.

Returning for a moment to the suggestion that the decision was about Netflix pushing consumers to streaming, we might be tempted to ask “hasn’t nudging consumers to a new technology by removing an outdated technology been done many times before?  See Apple with optical disks etc?”  This is a red herring argument.  Apple pushed consumers to new technologies in instances where the technology they were removing was both a ‘detail’ (a minor technology) and a reasonable alternative was available (USB, and ultimately the App Store).  With Netflix, the technology was neither minor nor is a reasonable alternative available, streaming’s limited selection notwithstanding.

The Way Out

So what’s Netflix to do?

Eat crow.

“We heard our customers and are returning to the old Netflix”.

Apologize for past misdeeds and move on.  It will be difficult to live down, particularly on the heels of their recent price change and they’ll need good advice from the right PR people on striking the right tone, but they still have an entrenched user base that they can get back in their good favor.

On a final note, Blockbuster, where are you with the messaging “manage your streaming and DVD viewing from one simple easy to use queue?”


One Response to How Netflix Made a Colossal Miscalculation by Splitting Into Qwikster

  1. Brandon says:

    Blockbuster already is trying to go at them with sending emails out saying “Tired of seeing red? Say Hello to Blockbuster!”… but i agree they need to do it on a mass market level, not just to old customers.

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