Netflix has made a big mistake and it’s not only in pricing

I want to preface this with the fact that I was a late comer to Netflix but thanks to my stepdaughter Jessica I’ve used and loved it for three years now. Given that I watch a lot of movies, both on DVD from Netflix and streaming from them through an AppleTV their recent price increase, which was significant, did not drive me away or even give me much pause.

This post from Reed Hastings, the CEO of Netflix, explaining the price increase: An Explanation and Some Reflections is what gives me pause. It’s a poorly written, convoluted explanation of a bad idea. Read the comments, they’re telling.

Here’s their video apology:

He makes no apologies for the price increase, just for not letting us know why Netflix has done it. The reason they did it is because they are separating their two businesses: DVD rental and streaming. The DVD rental business will be renamed Qwikster and the current web site will be rebranded with this name and a new logo and will sit at a new domain. It will have its own separate charge on your credit card.

While I agree that the future of Netflix is streaming movies over the internet this is the most awkward way to handle the transition I can imagine.

For a company that’s done well, it’s obvious to me that Reed Hastings and Netflix have no clue how their loyal customers are hurt by this and it’s not just the price increase, it’s the separation of the services into two web sites.

For me the appeal of Netflix is their web site where I can search for a movie, decide how I want to watch it (DVD or streaming if its available on both) and then, rate it when I’ve watched it. One web site, one search, decide on platform if possible, then one rating. And, the rating system helps fine tune the Netflix recommendation engine which has worked amazingly well for me, pointing me to movies I’d never heard of or considered before. I enjoy poking around the Netflix site rating and re-rating movies. The separation of the two services will mean I’ll have to do it twice.

At this point very little of the content I like to watch on Netflix is available through streaming so much of my business comes through DVD rental. Unless they’ve got much of their collection digitized and will be announcing it soon, I’d drop Netflix (streaming) before I dropped Qwikster (DVD rental).

It may be that the problems with the US Post Office will lead to enough of a price increase for mailing DVDs that the business model Netflix was founded on won’t work anymore. Anyone who’s thought about this for more than a minute understands that at some point in the future Netflix won’t be shipping out DVDs anymore but that transition from, as Nicholas Negroponte put it “atoms to bits” is as much about marketing and keeping “old skool” customers happy and in the fold as it is about an internal business model change that none of us customers were told about.

The mistake is the way they’re doing this, not the price increase on the service. This stumble may put them out of business.

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