Reed Hastings, Co-founder and CEO, Netflix:
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.
I like Reed Hastings. But this line worried me right off the bat – hopefully this doesn’t indicate he makes decisions based on fear rather than vision.
Companies rarely die from moving too fast, and they frequently die from moving too slowly.
When Netflix is evolving rapidly, however, I need to be extra-communicative. This is the key thing I got wrong.
In hindsight, I slid into arrogance based upon past success. We have done very well for a long time by steadily improving our service, without doing much CEO communication. Inside Netflix I say, “Actions speak louder than words,” and we should just keep improving our service.
But now I see that given the huge changes we have been recently making, I should have personally given a full justification to our members of why we are separating DVD and streaming, and charging for both. It wouldn’t have changed the price increase, but it would have been the right thing to do.
Communication was a problem, but not the problem. The problem was launching a product that wasn’t ready – and Reed Hastings knows it. That’s what he means by “we should just keep improving our service.” Netflix’s streaming service alone didn’t (and still doesn’t) deliver on the promise of enabling subscribers to easily enjoy movies and TV shows. When Netflix divided its business into two products by pricing DVDs and streaming separately, they were suddenly asking customers to pay for a product that wasn’t worth the price. There is no question that streaming is the future of Netflix’s business, and adjusting the pricing model to move their business forward and move their customers to a new product was smart. But the product wasn’t ready – it was still a just a feature of their original product.
So we realized that streaming and DVD by mail are becoming two quite different businesses, with very different cost structures, different benefits that need to be marketed differently, and we need to let each grow and operate independently. It’s hard for me to write this after over 10 years of mailing DVDs with pride, but we think it is necessary and best: In a few weeks, we will rename our DVD by mail service to “Qwikster”.
The way to communicate distinct offerings to a large customer base who doesn’t know or care who Reed Hastings is, is to create a brand. We could question the name choice (why make the name rhyme with the second largest movies website, Flixster, instead of an extension of your current brand, “Qwikflix”?). We can question the decision to rename the old product instead of the new one (up for debate). We can even question the decision to make Qwikster a separate company rather than a just new product brand (Qwikster.com reads “Qwikster, a Netflix Company” and the company has a CEO). But once they separated DVDs and streaming into two products by attaching individual prices, creating separate brands was the right move.
This transition will be difficult for Netflix/Qwikter, largely due to a trend that’s become common over the past decade and a half: singularity of company and product brand. Many Internet companies have only one core product: their website (see Amazon, Facebook, Google, Netflix, etc). When this happen, the company’s product often ends up carrying the same name as their company. This makes new product launches and transitions difficult to initiate because many new offerings should fall under your company brand, but should’t fall under your product brand.
When you launch new stuff, it has to either be a new feature in an existing product or a completely separate product itself. Consumers don’t understand anything in between. Netflix found their streaming service stuck in “no man’s land” when they announced an individual price for it without providing an individual brand. It became a feature masquerading as a product. By separating the DVD product and calling it Qwikster, thereby giving the name Netflix to the streaming product alone, “Netflix” is still a feature madquerading as a product but it’s clearer the company is dedicated to making it a productnoRor “Netflix” (the streaming product) to deserve its own name and pricing, it must be worth its price.
It comes down to this: when Reed Hastings and Netflix realized their DVDs-by-mail service and their streaming service had to become distinct businesses, the first step should’ve been to ensure each product was strong enough to support itself. When they gave streaming its own pricing and membership, they were asking people to pay for a feature, for the price of a product. Netflix will eventually develop their streaming feature into a killer standalone product by providing a sufficient breadth of content, but it was a mistake to separate pricing and naming before the product was ready.
Netflix tried to transition their customers to a new product too early – not because customers weren’t ready, but because the product itself wasn’t ready. Unfortunately it still isn’t. Let’s hope Netflix is ready soon.
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