I heard from the CEO of Netflix, Reed Hastings Earlier Today

Like 24 million others, I received an interesting email message today from Reed Hastings, CEO of Netflix. It went as follows:

Dear Bay,

I messed up. I owe you 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. Let me explain what we are doing.

For the past five years, my greatest fear at Netflix has been that we wouldn’t make the leap from success in DVDs to success in streaming. 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). So we moved quickly into streaming, but I should have personally given you a full explanation of why we are splitting the services and thereby increasing prices. It wouldn’t have changed the price increase, but it would have been the right thing to do.

So here is what we are doing and why.

Many members love our DVD service, as I do, because nearly every movie ever made is published on DVD. DVD is a great option for those who want the huge and comprehensive selection of movies.

I also love our streaming service because it is integrated into my TV, and I can watch anytime I want. The benefits of our streaming service are really quite different from the benefits of DVD by mail. We need to focus on rapid improvement as streaming technology and the market evolves, without maintaining compatibility with our DVD by mail service.

So we realized that streaming and DVD by mail are really becoming two different businesses, with very different cost structures, that need to be marketed differently, and we need to let each grow and operate independently.

It’s hard to write this after over 10 years of mailing DVDs with pride, but we think it is necessary: In a few weeks, we will rename our DVD by mail service to “Qwikster”. We chose the name Qwikster because it refers to quick delivery. We will keep the name “Netflix” for streaming.

Qwikster will be the same website and DVD service that everyone is used to. It is just a new name, and DVD members will go to qwikster.com to access their DVD queues and choose movies. One improvement we will make at launch is to add a video games upgrade option, similar to our upgrade option for Blu-ray, for those who want to rent Wii, PS3 and Xbox 360 games. Members have been asking for video games for many years, but now that DVD by mail has its own team, we are finally getting it done. Other improvements will follow. A negative of the renaming and separation is that the Qwikster.com and Netflix.com websites will not be integrated.

There are no pricing changes (we’re done with that!). If you subscribe to both services you will have two entries on your credit card statement, one for Qwikster and one for Netflix. The total will be the same as your current charges. We will let you know in a few weeks when the Qwikster.com website is up and ready.

For me the Netflix red envelope has always been a source of joy. The new envelope is still that lovely red, but now it will have a Qwikster logo. I know that logo will grow on me over time, but still, it is hard. I imagine it will be similar for many of you.

I want to acknowledge and thank you for sticking with us, and to apologize again to those members, both current and former, who felt we treated them thoughtlessly.

Both the Qwikster and Netflix teams will work hard to regain your trust. We know it will not be overnight. Actions speak louder than words. But words help people to understand actions.

Respectfully yours,

-Reed Hastings, Co-Founder and CEO, Netflix

p.s. I have a slightly longer explanation along with a video posted on our blog, where you can also post comments.

This is the latest in the brouhaha caused when Netflix abruptly changed the fee for their DVDs-by-mail part of their service from $2/month to $8/month.

Apparently, as a result, they are reported to have lost 1 million customers in the increasingly competitive world of streaming/DVD rental. More accurately however, they appear to have lost 800,000 customers in their DVD operation and only 200,000 in their streaming operation.

Thus it was that Reed Hastings, Netflix’s CEO, felt it necessary to apologize for the manner in which the change was handled, while of course, not backing down from the change itself.

I for one, discontinued their $2/month DVD service, but kept the separate $8/month streaming service. Perhaps that’s just my personal preference, not having a burning desire to see only the latest and greatest movies, but a broad variety of movies from the less recent past.

Right now, I have 68 movies lined up in my queue and no shot at watching them all before year end. I still think Netflix is close to being the greatest thing since sliced bread and cannot join those prophets of doom who proclaim the company dead and buried.

Clearly though, as the content providers introduce steep rate hikes for their content, things will become harder for Netflix. They recently lost programming from the Starz network, who refused the $300 million offered by Netflix for their content.

Starz apparently wanted Netflix to raise their streaming rates from $8 and price it in line with traditional cable service. Wisely, Netflix refused. Starrz will now look for another streaming vendor like Amazon to sell their wares to.

From me, many kudos to Netflix. The day they raise their streaming prices significantly, I’ll be gone. This all reminds me of the days the telecomms folks wanted to keep charging $2,000 a month for T-1 lines and delayed rolling out DSL ($30-100/month).

It also reminds me of every new vs. old battle, where the expensive/entrenched sought to fight off the cheap/new. They always failed.

In the United States at least, streaming is the future. Netflix still has 24 million customers and continues to grow at breakneck speed, despite this speed bump. I for one, will NEVER go back to paying $50-100/month for cable.

So Reed, no need to apologize. Charging $2/month to mail folks videos one after the other was clearly unsustainable and didn’t even cover the cost of shipping. Continue to pursue the new paradigm of streaming, – that’s the future. You’ll have my full support.

What about you? Do you use a newer streaming service yet like Amazon VOD, Hulu Plus or Netflix?

Tags: cable, DVD, mail, movies, Netflix, paradigm change, rates, Reed Hastings, rental, streaming

Category: News and Opinion