Saying Whoopsie: Netflix Actions Still Speak Louder

"This means no change: one website, one account, one password ... in other words, no Qwikster." — Reed Hastings 

After several trials and a comedy of errors, CEO Reed Hastings is trying one more time. The message is shorter. The writing is sloppy. But at least people understand what it means: No Qwikster for Netflix.

Qwikster was the proposed solution to accomplish Hastings' long-term goal to completely separate Netflix from the DVD shopping and shipping business. To date, it only accomplished one goal. The restructuring was ridiculous enough that it has all but quelled the alarm over Netflix price increases in July.

Reed was clear about that too. "While the July price change was necessary, we are done with price changes," he said once again. Qwikster, even though the company had already reported it had divided itself into two units, obviously was not necessary. According to some, that makes Qwikster a modern equivalent of New Coke. I don't think so, exactly.

Communicating Change And Price Increases. 

In a few years, assuming Netflix recovers and it probably will, some will ponder whether the price increases and subsequent Qwikster campaign generated publicity and brand awareness that will pay dividends at the bank later.

Maybe it will. Maybe it won't. My take on the whole buzz up is that it didn't have to happen.

Communicating change, even uncomfortable change, is relatively easy. Had Netflix given customers a head start and a better pricing model, it could have raised prices on DVD shopping and shipping and incentivized the move to streaming. The majority of subscribers might have voluntarily switched.

And if the company was serious about skipping out on DVD shopping and shipping, it could have eventually frozen new DVD subscribers some time after the switch. Eventually, the DVD division would have died a quiet and less painful death. No big deal. Netflix knows DVD mail programs are numbered because product purchase and shipping costs are too expensive to make a profit.

Netflix wants to be a streaming service and anybody who doubts it ought to look at its investor relations overview. Nowhere does the description include anything about shipping. On the contrary, the description emphasizes 25 million subscribers over 200 devices. At $8 per subscription, that's $200 million per month without the hassle of pressing discs.

The solution was painfully simple, but overlooked. All Netflix had to do was make its DVD shipping product less attractive over the long haul by making it pay for itself. All the while, it could have been up front and honest with customers that the cost of products and shipping caused the price increases, much like utilities do every year.

At the same time, incentivizing the switch would have made sense because Netflix could probably bank on the idea that most people who try streaming are less likely to go back to shipping. It could have even partnered with some of the device manufacturers, underscoring how easy it is (and encouraging people that today might be the time to upgrade). It all could have been handled seamlessly and without the silly spin of calling a "price increase" a "price change."

Who cares what Netflix does anyway and why does it matter? 

Beyond investors and subscribers, it really doesn't matter. It also makes for a great case study in communication. And the reason there is some significance is simple enough.

Netflix prides itself on the following four traits in an increasingly competitive market: outstanding value, robust selection, customer satisfaction, and adaptability. It believes this is what sets it apart in the marketplace.

The handling of the communication in recent months, especially because the company prolonged the negative communication, cuts deeply at three of those four traits. Customers felt the new price change was not an outstanding value. Customers felt the decisions eroded customer satisfaction. And customers believe that while Netflix might be adaptive, it is not adaptive to the customers it serves.

The worst communication practice for any company is to communicate against the value proposition of the company, especially if it disproves the majority of them. Investors clearly did not appreciate the missteps. Netflix stocks dropped to almost a third of their value (from around $300 to $100 per share) before the price increase. In other words, the lost valuation may have paid for the price increase.

But the real indicator is yet to be announced. On October 24, Netflix will have to report its earnings. And along with those earnings, an accounting of how many more customers are disenfranchised.

Saying Sorry: Netflix Actions Still Speak Louder

When the Netflix fiasco started in July, we pointed out that Netflix doesn't want to be in the DVD shopping and shipping business anymore. Back then, the price increases alone were enough to convince anyone. But we pointed out CEO Reed Hastings had said as much, several times over.

We also mentioned that Netflix wasn't done surprising customers. The company's long-term goals include moving streaming subscribers from household accounts to individual accounts, thereby doubling or tripling or quadrupling their rates when it "feels more natural."

But CEO Reed Hastings doesn't want to talk about that. He wants to talk about Qwikster. 

Qwikster is the new business that Netflix is spinning off to handle the DVD shopping and shipping business. The companies will not be integrated. Qwikster will have a new website. Qwikster will have new reviews. Qwikster will be billed separately on your charge card.

The real oddity, however, is how the entire announcement is framed up. Hastings nearly apologizes for not communicating one change, and then goes on to share all the changes they haven't communicated, again. Even the ending he wrote was off the reservation: "Actions speak louder than words. But words help people understand actions."

Sometimes that is true. But there is another line of logic left out of the equation. You can understand the actions, but it doesn't make the actions right. Most people learn that in kindergarten, such as the first time they play a prank on a classmate. Understand or not, a second black eye is hard to forget.

Communicating change is easy. Hastings chooses to makes it hard. 

Given that the first fiasco cost the company about one million of its 25 million subscribers, one would think that Hastings would have rolled the split, perhaps reducing the subscription rate of one of them.

Some customers might have seen him as a hero. It would have also carried a "we heard you" statement,  which would have helped the company sell the split. Ergo, we found a way to reduce rates and that requires us to offer both services under two different companies. The fallout might have been minor. But instead, their communication with customers looks a little bit more like this ...



At minimum, any other approach would not have overshadowed the upcoming Neflix-Facebook integration. And one would assume that it would be the communication Netflix wants people to see. Certainly it would have been better than the nightmare someone dreamed up.

Companies don't have to listen to customers. Sure, that's true. 

Bruce Temkin takes a very even-handed approach on the Netflix affair (hat tip: Geoff Livingston), even if he might be wrong that the move won't cost more customers. At minimum, it will prompt what Hastings wants many of them to do anyway — drop DVD all together and split households into individual accounts (something the new Facebook service can help them do). And then what?

It's hard to say. Streaming services are not like the original Netflix model. It's an increasingly crowded space that promises more competitors than the space that used to be the core service of the company. And without DVD shipping, Netflix doesn't just lose its value proposition. It leaves the doors open.

Still, for now, it is Hastings' call. Much like the recent changes to Facebook, company owners call the shots. Customers do not have to be part of the equation. All they can do is vote with their feet. And sometimes other companies will jump all over the opportunity to help them along, right out the door.

I understand what Hastings wants to do. I really do. He could probably accomplish it too, even if some of it feels a bit sleazy. But as it stands today, delivering excuses and calling them explanations is undermining the company's ability to accomplish anything it wants to do. It might even bury it faster.

Related Articles. 

• The Netflix Apology: Good Idea, Bad Execution  by Patricio Robles

• Parsing Netflix's Apology by David Pogue

• Netflix Says It's Sorry, Then Creates New Uproar by Michael Liedtke

Increasing Rates: Netflix Actions Speak Louder

The writing was already on the wall, but it wasn't writing that sent the real message. Netflix doesn't want to be in the DVD shopping and shipping business anymore. If you want to hold a movie in your hands, you are better off visiting your local Redbox.

The new price increase reflects its decision. Never mind those sensational headlines that scream 60 percent increases. The new plans are pretty straightforward. People can choose unlimited streaming (no DVDs) for $7.99 a month, unlimited DVDs one at a time (no streaming), for $7.99 a month (Blu-Ray is $2 more), or both services for $15.98 a month (with a broader selection).

If you're nutty, you can have as many as four DVDs out at one time. The price for that service is $34.99 per month.

Some people are complaining, saying that they will dump the DVDs all together and Netflix will lose money. No they won't. As soon as the company can dump DVDs and Blu-Ray, the better. The entire point of the price fix is to force you to make the choice that Netflix has already made. CEO Reed Hastings has said it.

"We are now primarily a streaming video company," Hastings said.

Initially, Netflix investors couldn't be more thrilled (although some started selling as customers pushed back). They had every reason to be thrilled, because unless you cancel the service, there is a plan. And the plan looks pretty great on paper. In fact, there are more changes that Netflix is looking at, including scrubbing the household model customers are used to and moving everything to an individual member basis.

"When our focus was primarily DVD rental, we talked about our opportunity in terms of households, in particular the number of households with broadband access, which is more than 70 million households. Another way to view our potential opportunity is to consider the number of households that subscribe to home entertainment, which includes cable and satellite subscribers, a market estimated at about $68 billion in annual revenue. In either case, we were describing a very big potential market, giving us a lot of room to grow.

More recently, as streaming has become central to our business, we believe there may be an opportunity to change our focus from a household relationship to an individual relationship, since streaming is viewed on personal devices, such as phones, tablets, and laptops, as well as on shared large screen televisions. As we think about this long-term shift from a household to a personal relationship, we are starting to think internally that our opportunity could be viewed as the number of mobile phone subscribers, a group that both invests in electronic content and can afford $7.99 for home entertainment. Needless to say, that is a large opportunity.

The evolution toward individual memberships will take time, and we are still thinking about how to best do it. One option could be to allow an account to add additional concurrent streams (using the analogy of our DVD business, it would be like choosing a higher-priced plan that allows a subscriber to have more DVDs at home). Or it could be that there is a price point that would encourage multiple accounts in one household. In either case, our long-term goal is to evolve the Netflix service so that it feels more natural to have a personal account. We will also be working on broader Facebook integration which we hope will further the notion of personal accounts." — Netflix, July 14, 2011

Every communication counts when choosing a service provider.

Personally, this is one of the fundamental flaws with most media "rental" agreements. The companies in charge are empowered to rescind their contracts, raise rates, and change services any time they want. This extends to not only Netflix services but cable and satellite companies too.

But where Netflix really stands out is in its blatant mission to not only increase its rates today, but tomorrow too. It has been sharing this news with investors for some time; customers not so much. The Investor FAQ says it all. They want to manipulate customers into streaming only and then divide their accounts among individuals inside the household.

More than likely, customers will do it too. Sure, there will be some grumbling, but entertainment addiction is alive and well. Most of us gave up free broadcast for upwards of $100 or even $200 a month services (plus mobile) and we still purchase DVDs or their digital equivalent anyway.

At the moment, Netflix is hoping you won't notice the above graphs and it expects the colorful commentary to die down. Maybe it will. Maybe it won't. Personally, I'm split. But then again, I'm not a Netflix customer.

Don't get me wrong. The communication was rotten. Netflix could have phased it in much like it plans to phase in personal accounts over household accounts, making it so people don't notice so much and "feel more natural." But at the same time, the only recourse Netflix customers have (short of organizing with stated objectives) is to dump the service en masse.

I don't think they will. I think most will do exactly what Netflix wants. Netflix wants to get out of the mailing business, which costs considerably more than its streaming arrangement. So, if you dump mail, you're not really protesting at all — you're doing Netflix a favor. That favor isn't nearly as big as the favor you will do when everybody in your home wants an individual account, but this is clearly the first step to make it happen.

It's a plan that is, very literally, worth billions for a company that suddenly makes people reminisce about Blockbuster. But for communication pros, the real lesson goes back to not mixing your investor and customer messages. Everything is public nowadays.

Faking Fans: The Flawed Netflix Apology

In 2007, the Federal Emergency Management Agency (FEMA) learned that staging fake news conferences, complete with fake reports, was a bad idea. While the tactic defied common sense, spin remains alive and well in some public relations circles.

Netflix Inc. hired actors to pose as fans in Toronto, including stereotypical roles such as "mothers, film buffs, tech geeks, couch potatoes." The gimmick, according to Netflix, was to use the actors to gin up enthusiasm and attract a crowd.

Misleading the public was bad enough, but the Netflix actors began to offer up even more excitement by accepting media interviews. The gimmick was undone after reporters noticed the actors even had instruction sheets on how to act and how to give a good interview.

"We are embarrassed," spokesperson Steve Swasey said. "We regret that this put a blemish on what should have been a perfect day for Netflix."

While Netflix claims embarrassment, it continued to place spin on the situation. Swasey said they are not sure who decided the actors should give media interviews under false pretenses. However, the deception is in the details. It didn't accidently happen if the actors had media interview scripts to work from.

In fact, as Swasey says it was never the company's attempt to mislead the public or the media, the Globe and Mail published the instructions given to actors. It says very clearly that "EXTRAS are to look really excited, particularly if asked by MEDIA to do any interviews about the prospect of Netflix in Canada."

All of which begs the question whether Netflix is embarrassed because of the actors or simply embarrassed that they were caught. The latter seems obvious, especially for a company in the U.S. where the FTC recently accepted a settlement from Reverb Communications for boasting about fake app reviews.

Faking fans, reporters, and reviews is not public relations.

While the allure of being the star is always tempting for some, public relations professionals are always tasked to do more than represent their clients. The profession asks them to serve both organizational and public interest. This is doubly important, even in marketing, when you consider how much hinges on a company's ability to make a realistic promise.

In this case, Netflix had always accurately conveyed a brand promise and delivered on that promise. It seems to defy logic that the company should attempt to prove it delivers on promises by risking its reputation with a lie and then persisting to lie by attempting to downplay the bad decision.

The takeaway here is pretty obvious. Faking a splash is less effective than not making a splash. And, equally important, companies caught in the act might as well confess it up front before someone releases the script and undermines the sincerity of any apology. At least, I think so.

Removing Customers: They Don't Want You

Ever since Blu-Ray started selling 100 units for every 98.71 units of HD-DVD last year, the writing was on the wall. There was going to be change. And for some, change for the sake of change would be painful.

Earlier this year, Netflix sent some consumers in a tail spin after announcing that it will carry high definition videos in the Blu-Ray format backed by Sony and others, but not in the HD-DVD standard once backed by Toshiba. Today, in what appears to be a licensing deal gone temporarily wrong as opposed to an answer to Microsoft's Xbox Live campaign, the Xbox 360 will not stream Sony Columbia Pictures Films. (Sony Pictures Entertainment movies are still available.) Sony Columbia Pictures Films doesn't want Xbox 360 customers.

Did you get all that? Netflix didn't want Toshiba customers. Now, Sony Columbia Pictures doesn't want Netflix customers, at least not those using an Xbox 360. And, long term, it seems doubtful Netflix will want Blu-Ray customers because the adoption rate is less than stellar.

Sure, Netflix remains vigilant in communicating that the company's current business strategy is still firmly rooted in DVD technology, but most weeks it communicates a growing number of streaming deals. However, when you compare a few choice quotes from Netflix, they don't add up:

"There are 100 million DVD players in U.S. households. If you really think people are going to stop renting DVDs, you need to lie down until that thought passes.” — Barry McCarthy, CFO, Netflix.

"As watching instantly becomes a more prominent part of the Netflix service, our goal is to have all of our streaming content licensed for all of our partner devices. We're doing well in this area, but it will take some time before we fully achieve that goal." — Steve Swasey, vice president of corporate communications, Netflix.

More and more, it seems electronic companies keep asking consumers to replace hardware at a dizzying pace just so they can replace all their media content once again (just in time for the next new hardware) or, perhaps long term, only allow them to borrow content from time to time for a monthly subscription price model that made cable companies profitable.

So what are they really saying? Your children's children won't know what a DVD is (or Blu-Ray for that matter) and they might not know what a book is either. While we keep aiming to make content more portable, the side effect might be that content becomes increasingly controlled and temporary. That will be painful. But as mentioned, change for the sake of change is always painful.