Netflix self-destructs

First, less content at twice the price. Now a clunky 'Qwikster.' Institutional stupidity writ large.

RESTON, Va., September 19, 2011 – Just a few weeks back, high-flying Netflix, the unchallenged king of the streaming video and DVD rental juggernaut, made one of the greatest corporate PR blunders in modern history. Without warning, they gave their customers short notice that the price of their combined streaming/DVD subscription service would virtually double in September.

This announcement came on the heels of another unpleasant surprise: the sudden disappearance of a batch of popular movies from Netflix’ site via SONY’s “Starz”. Let the opening grafs of a June 23 story on the LA Times’ website relate the particulars:

“As editor of a blog that recommends what to watch on Netflix, Taylor Nikolai is used to seeing movies come and go from the online streaming service. But even he was surprised last Friday when more than 250 films from Sony Pictures were suddenly no longer available.

“‘It’s the first time I can remember a huge bulk of movies disappearing without advance warning,’ the Minnesota resident said.”

The timing of these events couldn’t have been worse. Not only are Americans still staggering under increasing costs for nearly everything. It also looks like the country is headed for the second leg of the Great Recession this fall. So what better placed to trim the family budget again by cutting off the subscription of an entertainment vendor that tells you next month you’ll have to pay double for less content?

The initial reason given for Netflix’ astonishing price hike was vaguely ascribed to “costs” associated with the DVD side of the business. But the ham-handed way the news was dropped on subscribers as well as the sheer percentage size of the increase combined to provoke almost instantaneous outrage on Twitter, Facebook, and other social media, not to mention the blogosphere with its dense forest of web comments and commentary. Talk about soiling your brand.

The old Seinfeld show was long famous for its hilariously predictable comic formula: “No hugging, no learning.” It seems as if Netflix took this model to heart, adopting it as its corporate mantra. In spades.

Just this morning, Reed Hastings, Netflix’ co-founder and current CEO, spammed subscribers with a perfunctory, smarmy apology for his previous PR screw-up. Just to add to the entertainment value, he dug his company’s black deeper still by declaring that Netflix’ services would now be split into two entirely different, unrelated entities.

According to Hastings, within a short period of time, Netflix’ streaming business will separate from the DVD business, retaining the company’s original name. The mail-order DVD biz will become an entity known as “Qwikster,” because, according to Hastings, “it refers to quick delivery.” How lame is that? How much did Hastings pay PR hacks to come up with that highly original and memorable name?

Netflix/Qwikster humorous graphic.

A new logo for Netflix?

But wait! There’s more.

Hastings points out that other “improvements” in both services will follow. Like the one described in his very next sentence as a “negative.” Namely, that “the Qwikster.com” and the “Netflix.com” sites will NOT be integrated. That’s right, sports fans. You’ll have to re-enroll in the other service—presumably Qwikster—and you’ll now get two separate bills for your trouble.

Let’s see. Twice the price. Two times the record and bookkeeping (read video queuing and billing). And oh, yes. Since SONY/Starz has announced they’re pulling out of their agreement with Netflix come January, much less desirable content for your entertainment dollar. (The small print of this agreement was at least part of the reason why Starz pulled a batch of films from Netflix in June.)

But hey, not to worry, writes Hastings. Qwikster’s new DVD envelope, he solemnly promises, “is still that lovely red.” No doubt, subscribers should be grateful for this, the sole apparent benefit of this summer’s announced price hike.

Just how many customers Netflix will retain after its trifecta of epic blunders remains to be seen. Unofficially, Netflix lost a bundle of subscribers after dropping its first bombshell. How many will, er, stream for the exits this time?

Back in CFO land, business heads have long worried that Netflix’ DVD model was becoming unsustainable. Warehousing and handling overhead costs for providing the service have ballooned—allegedly at least part of Netflix’ reason for adding the streaming model in the first place. But if these issues were already known to Netflix management many quarters ago, why wasn’t the problem—and its associated cost—tackled by the corporate hierarchy when it first appeared on the radar screen?

Another question: which entity will get saddled with the red ink the DVD business is supposed to have been generating? Whichever way the cookie crumbles, one of the entities—probably Qwikster—will get burdened with most of the debt, making its unprofitability and possible disappearance a foregone conclusion.

The whole thing doesn’t seem to make a particle of sense. Unless you look at the company’s insider stock sales. Corporate bigwigs have been unloading mass quantities of the stock since the last month of 2008 with the biggest dumps occurring in 2010. Granted, a number of these sales were the result of incentive stock options which is normal and customary as tycoons try to diversify their holdings. Even so, however, the lack of insider buying during this period would seem to raise a few red flags in light of current corporate events.

Making matters appear even worse, both sides of Netflix’ business are becoming content-deprived as we’ve already pointed out. Currently, third-rate crap now predominates on the company’s streaming side. Worse still, a lot of it is easily available on demand from viewers’ cable/content providers such Verizon FiOS, to which this critic currently subscribes. So why pay for it twice?

In his e-letter, Hastings opines that streaming video is his company’s true future. But if this is the case, why are his current streaming offerings so poor, and likely to become worse, particularly in light of SONY’s and Starz’ apparently imminent departures? What a way to alienate a heretofore satisfied clientele! 

The consumer’s anger at Netflix’ latest moves in TV and video land is palpable, at least if you’re in the habit of perusing the Internet and the blogosphere. A quick look at the Netflix blog reveals a continuing barrage of almost universally negative comments, at least as of this writing. It will be interesting to see how many lost subscribers this latest goof will cost this suddenly beleaguered but now severely tarnished corporate superstar.

On a brighter note, one of the dubious joys of our capitalistic system—at least what’s left of it—is that one company’s lunacy and poor management can often prove to be another’s gain. Ailing Blockbuster—whose offerings of late seem to be quite competitive with Netflix—is a potential gainer. Another: the ubiquitous Amazon has been horning in on Netflix territory with its continuing offerings of free entertainment media for subscribers to its Prime service.

But I’m wondering. No one has said a word about the real behemoth in the entertainment space: Apple. Apple has long been rumored to be developing a new TV-centric product, or perhaps a new kind of TV itself. That company’s cloud service is slated to go live in October at last check. Could this aggressive computer and entertainment behemoth—with its close ties to Disney—be positioning itself for a knockout punch on Netflix’ already-floundering content delivery model?

The iPhone has already made mincemeat of one-time kings-of-the-hill like RIMM (Blackberry) and Nokia. The iPad has killed off potential tablet competitors like HP even before the latter’s product got out the starting gate. iTunes remains the undisputed online leader in legal music downloads. Could iTV be what Netflix is really scared of and scrambling to defense against?

As they used to say on 1950s TV, “Don’t miss our next thrilling episode.” On second thought, the old TV “Batman” cliffhangers used to conclude with a more appropriate warning: “The worst is yet to come!”

 


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Terry Ponick

Now writing on investing, politics, music, movies and theater for the Washington Times Communities, Terry was formerly the longtime music and culture critic for the Washington Times print edition (1994-2009) before moving online with Communities in 2010.  

 

 

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