Monday October 10th 2011
Business and management
SchumpeterNetflix
Undoing the mess
Oct 10th 2011, 19:48 by J.B. | LONDON
NETFLIX, a Silicon Valley firm that sends DVDs through the post as well as streaming films and television via the internet, has gradually built a reputation for two things: superb customer service and great technological foresight. Rather like Apple, it has delighted people by seeming to know what they wanted before they knew it themselves. Following several months of ruinous missteps and reversals, Netflix’s aura has dimmed. But the company is beginning to correct its mistakes.
In July Netflix announced that it would charge for its DVD-by-post service separately from its streaming service. People had been able to pay $9.99 a month for the right to rent any number of DVDs (provided they had only one disc at a time) and stream all the films and television shows in the company’s catalogue. Henceforth, customers would be offered a choice: DVDs for $7.99 a month, or streaming for $7.99 a month. Anybody who wanted both would pay $15.98.
The move did not go down well with the firm’s 25m subscribers. So in September Netflix’s boss admitted that he had “messed up”. Reed Hastings concluded that the firm had not been clear about what it was doing. It would therefore separate DVDs from streaming entirely. Netflix would become a streaming service, as it already is in some countries, such as Canada. Old-fashioned folk who wanted DVDs would be shunted into a separate service, named “Qwikster”, with its own website and its own billing system.
At that, customers went nuts. Hostile comments piled up on Netflix’s website and on its Facebook page. The company was flayed in blogs and newspapers, including The Economist. As one of the tens of thousands of hostile online commentators noted, Netflix’s boss had made a kind of category error. He had concluded that the firm was engaged in two distinct enterprises: a DVD-by-post business and a streaming business. In fact, Netflix is simply in the home-entertainment business. By forcing its customers to choose between different delivery systems for films and television shows, it had narrowed people’s options.
Your correspondent argued that Mr Hastings had made another fundamental mistake. An oddity of American law known as the “first-sale doctrine” means that rental outfits such as Netflix are allowed to hire DVDs as soon as they go on sale to the public. To stream content, by contrast, Netflix must do a deal with a studio. Some studios, like Warner Bros, make the firm wait several years for its films. Others, like the pay-TV broadcaster HBO, refuse to let Netflix stream their shows at all. All media firms demand more money as Netflix becomes richer.
As a result, Netflix’s library of streaming content, although instantly available, is far smaller than its library of DVDs. By separating DVDs from streaming, Netflix was effectively offering its customers a choice between two unattractive options. Did they want access to a huge catalogue of content, including recently-released films and TV shows, which would take a couple of days to arrive in the post? Or did they want instant access to a much smaller selection of older content?
Wisely, Netflix has now reversed course. On October 10th the firm announced that it was dropping the Qwikster plan. Its stock price has recovered—but only a little. A mistaken decision has been quickly buried. Netflix’s reputation for customer service and technological competence will take longer to repair.
About Schumpeter
In this blog, our Schumpeter columnist and his colleagues provide commentary and analysis on the topics of business, finance and management. The blog takes its name from Joseph Schumpeter, an Austrian-American economist who likened capitalism to a "perennial gale of creative destruction"
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I'm actually somewhat happy for the debacle. I recently went back to Blockbuster for the first time in years and found they have a new $1 rental policy on many DVDs. Since I rarely have time to watch a movie except on weekends, but do use Netflix for streaming TV shows, I never really got more than 4 DVDs a month from Netflix. Now, with the changes, I realized I could save money by getting streaming only from Netflix and getting the odd DVD from Blockbuster.
The downside is that I can't get the odd rare DVD from Netflix but this was always infrequent enough that if I care that much I can just buy the thing and come out ahead. Also, since both Amazon and iTunes has films and TV I can get some things I want to see off them instead. At the end of the day, I've saved a bit of cash then if Netflix had simply raised their price by a somewhat more modest amount for each service (I take it as a given they were going to have to raise prices to some degree, if prices stayed at $9.99 that would have been better for me but that was always unlikely to be viable in the longer term).
Not what Netflix intended I'm sure.
The underlying news is the Price Escalation, and that will not be reversed.
Basic law of Supply and Demand. Their market share will suffer.
It is not cutting the pie in half that is making customers angry, it is shrinking the pie. Less pie for your dollar.
And Netflix is not quick enough to discern this.
This leaves big opportunities for Red Box, Blockbuster, Apple Media and particularly Amazon.
Netflix has changed the world of watching movies and tv series. I think it is a lot easier to be a flat rate fee a month for movies than going out to a theater where you possibly could pay doubled the amount of price depending on who goes. Also it is a lot easier to watch a movie on your tv at home than having to hassle the roads or even gas prices to get to the theater. It also costs a lot less for the monthly cost than going to Blockbuster or any movie store to get movies.
Netflix definitely screwed up by changing their services without giving the customers much notice or information about what was happening. At least they are trying to amend their mistake, and I don't think they will lose too much business from this incident.
Netflix still has a fairly large customer base to draw from. I think they would have lost a lot more customers if they had gone through with the Qwikster plan. They made a good decision on rescinding it, but the damage was already done to their stocks unfortunately. Many customers are still unhappy about the break with Netflix DVD and streaming service and this mess is not giving consumers any more confidence in the company.
Unfortunately, Netflix now has a problem with its streaming service. That is, the picture stops dead while the program continues running in the background. You can hear the audio running normally, but the picture is frozen and so is the computer. When it finally releases 30 seconds or so later, there is a big jump as the picture catches up with the audio. In a 90-min video, this may happen every 10 minutes or so.
I and others have noticed this on a number of offerings. I have very reliable high-speed internet service and haven't had this problem with other streaming services, just with Netflix. I have reported it several times to Netflix -- which usually does have great customer service -- to no avail.
I dropped the DVD service when they raised the price. Now it looks like I'll be dropping the streaming service as well.
As a current Netfilx user, I believe the idea of streaming movies and television shows is extremely convenient because of how easily accessible it is. I enjoy the low monthly few, but as stated in the article, the selection is minimal. If Netfilx could find a way to increase their movie options and maintain the small charge, I think they could recover quickly from this.
Netflix made the mistake of getting too ambitious. They merely forgot two things: 1) people hate spending more money for the same service, and 2) America's in a recession.
As long as Netflix learns from this fiasco and plays smart for the next couple years, they should be able to get back on top and reestablish their superiority on the home entertainment market.