strategymemos.com

Netflix · 18 Sep 2011

An Explanation and Some Reflections

Netflix’s CEO apologises for how a price change was handled, and splits DVD rental into a separate service, Qwikster.

Author
Reed Hastings, CEO
Written
18 Sep 2011
Document
Company blog post
Notes
9: 7 fact, 2 editorial
Last reviewed

Short excerpts from Reed Hastings’ post on the Netflix blog of 18 September 2011; the full text is in the Internet Archive copy linked here.

Excerpts · 9 notes
Netflix2011
From:
Reed Hastings
Date:
September 18, 2011
Subject:
An Explanation and Some Reflections

I messed up.Fact · 1Known at the timeOn 15 September 2011, before this post, Netflix told shareholders it was lowering its domestic subscriber estimates for the third quarter, while calling the split of its services “the right long-term strategic choice”.SourceNetflix, Form 8-K filed with the SECLetter to Shareholders (Exhibit 99.1), 15 September 201115 Sep 2011 I owe everyone an explanation.

It is clear from the feedback over the past two months that many members felt we lacked respect and humility in the way we announced the separation of DVD and streaming, and the price changes.Fact · 2Known at the timeOn 12 July 2011 Netflix said it would stop offering unlimited plans that combined streaming and DVD. Unlimited streaming stayed at $7.99 a month, unlimited DVD one disc at a time was $7.99, and both together $15.98. New pricing applied to existing members’ charges on or after 1 September.SourceNetflix, via PR NewswireNetflix to Offer New Unlimited DVD Plans and Will Separate Streaming and DVD Plans in the U.S.12 Jul 2011

[ … ] Not shown: Hastings says the intent was not disrespect, and apologises.

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.

[ … ] Not shown: AOL and Borders as firms that protected their first business.

Companies rarely die from moving too fast, and they frequently die from moving too slowly.Editorial · 3Known at the timeThe post’s strongest line, and its defence. It recasts an unpopular price and product change as courage, and puts the alternative, protecting DVD, in the company of AOL and Borders. The risk it leaves out is the one this post exists to repair: moving fast without bringing customers along.

When Netflix is evolving rapidly, however, I need to be extra-communicative. This is the key thing I got wrong.

[ … ] Not shown: Arrogance from past success, and “actions speak louder than words”.

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.Fact · 4With hindsightThe post names communication as the mistake and keeps the price. In its 24 October 2011 letter Netflix ranked the causes differently: the primary issue was that long-term members “felt shocked by the pricing changes”, and the lack of explanation compounded it. It said the rebrand’s impact was “relatively minor” by comparison.SourceNetflix, Form 8-K filed with the SECLetter to Shareholders (Exhibit 99.1), 24 October 201124 Oct 2011

[ … ] Not shown: Why members value the DVD catalogue.

DVD by mail may not last forever, but we want it to last as long as possible.Fact · 5With hindsightOn 18 April 2023 Ted Sarandos, by then co-CEO, announced that Netflix would wind down DVD.com after a 25-year run and ship its final discs on 29 September 2023.SourceNetflixNetflix DVD - The Final Season18 Apr 2023

[ … ] Not shown: Why streaming needs to improve without DVD compatibility.

So we realized that streaming and DVD by mail are becoming two quite different businesses, with very different cost structuresFact · 6With hindsightFrom the fourth quarter of 2011 Netflix reported domestic DVD and streaming as separate segments. That quarter DVD earned a 52.4% contribution margin and domestic streaming 10.9%; Netflix called the DVD model “predominantly variable cost based”.SourcesNetflix, Form 8-K filed with the SECLetter to Shareholders (Exhibit 99.1), 24 October 201124 Oct 2011Netflix, Form 8-K filed with the SECLetter to Shareholders (Exhibit 99.1), 25 January 201225 Jan 2012, 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”.Fact · 7With hindsightOn 10 October 2011 Hastings posted that Netflix would keep one website and one account for streaming and DVDs: “no Qwikster”. The October shareholder letter called it the “proposed-and-now-cancelled rebranding”, and said Netflix had “yet to decide” on video game discs.SourcesNetflix blog (Internet Archive copy)DVDs will be staying at netflix.com10 Oct 2011Netflix, Form 8-K filed with the SECLetter to Shareholders (Exhibit 99.1), 24 October 201124 Oct 2011

We will keep the name “Netflix” for streaming.

[ … ] Not shown: The Qwikster site, and a video games upgrade at launch.

A negative of the renaming and separation is that the Qwikster.com and Netflix.com websites will not be integrated.Editorial · 8With hindsightThe post states the customer cost of the split plainly: two sites, two card entries, ratings that do not carry over. The benefits it lists fall mostly to Netflix’s own teams. The reversal later gave exactly this cost as its reason.SourceNetflix blog (Internet Archive copy)DVDs will be staying at netflix.com10 Oct 2011 So if you subscribe to both services, and if you need to change your credit card or email address, you would need to do it in two places.

There are no pricing changes (we’re done with that!).

[ … ] Not shown: Two card charges, Qwikster’s CEO, and the red envelope.

Our view is with this split of the businesses, we will be better at streaming, and we will be better at DVD by mail. It is possible we are moving too fast – it is hard to say.Fact · 9With hindsightNetflix’s October letter answered the question: “What we misjudged was how quickly to move there.” Unique US subscribers fell to 23.79 million in Q3 2011, from 24.59 million in Q2.SourceNetflix, Form 8-K filed with the SECLetter to Shareholders (Exhibit 99.1), 24 October 201124 Oct 2011

[ … ] Not shown: Global streaming plans, thanks and a second apology.

Actions speak louder than words. But words help people to understand actions.

All 9 notes and their sources
  1. I messed up.Fact · 1Known at the timeOn 15 September 2011, before this post, Netflix told shareholders it was lowering its domestic subscriber estimates for the third quarter, while calling the split of its services “the right long-term strategic choice”.SourceNetflix, Form 8-K filed with the SECLetter to Shareholders (Exhibit 99.1), 15 September 201115 Sep 2011Back to the passage
  2. we lacked respect and humility in the way we announced the separation of DVD and streaming, and the price changes.Fact · 2Known at the timeOn 12 July 2011 Netflix said it would stop offering unlimited plans that combined streaming and DVD. Unlimited streaming stayed at $7.99 a month, unlimited DVD one disc at a time was $7.99, and both together $15.98. New pricing applied to existing members’ charges on or after 1 September.SourceNetflix, via PR NewswireNetflix to Offer New Unlimited DVD Plans and Will Separate Streaming and DVD Plans in the U.S.12 Jul 2011Back to the passage
  3. Companies rarely die from moving too fast, and they frequently die from moving too slowly.Editorial · 3Known at the timeThe post’s strongest line, and its defence. It recasts an unpopular price and product change as courage, and puts the alternative, protecting DVD, in the company of AOL and Borders. The risk it leaves out is the one this post exists to repair: moving fast without bringing customers along.Back to the passage
  4. It wouldn’t have changed the price increase, but it would have been the right thing to do.Fact · 4With hindsightThe post names communication as the mistake and keeps the price. In its 24 October 2011 letter Netflix ranked the causes differently: the primary issue was that long-term members “felt shocked by the pricing changes”, and the lack of explanation compounded it. It said the rebrand’s impact was “relatively minor” by comparison.SourceNetflix, Form 8-K filed with the SECLetter to Shareholders (Exhibit 99.1), 24 October 201124 Oct 2011Back to the passage
  5. DVD by mail may not last forever, but we want it to last as long as possible.Fact · 5With hindsightOn 18 April 2023 Ted Sarandos, by then co-CEO, announced that Netflix would wind down DVD.com after a 25-year run and ship its final discs on 29 September 2023.SourceNetflixNetflix DVD - The Final Season18 Apr 2023Back to the passage
  6. streaming and DVD by mail are becoming two quite different businesses, with very different cost structuresFact · 6With hindsightFrom the fourth quarter of 2011 Netflix reported domestic DVD and streaming as separate segments. That quarter DVD earned a 52.4% contribution margin and domestic streaming 10.9%; Netflix called the DVD model “predominantly variable cost based”.SourcesNetflix, Form 8-K filed with the SECLetter to Shareholders (Exhibit 99.1), 24 October 201124 Oct 2011Netflix, Form 8-K filed with the SECLetter to Shareholders (Exhibit 99.1), 25 January 201225 Jan 2012Back to the passage
  7. In a few weeks, we will rename our DVD by mail service to “Qwikster”.Fact · 7With hindsightOn 10 October 2011 Hastings posted that Netflix would keep one website and one account for streaming and DVDs: “no Qwikster”. The October shareholder letter called it the “proposed-and-now-cancelled rebranding”, and said Netflix had “yet to decide” on video game discs.SourcesNetflix blog (Internet Archive copy)DVDs will be staying at netflix.com10 Oct 2011Netflix, Form 8-K filed with the SECLetter to Shareholders (Exhibit 99.1), 24 October 201124 Oct 2011Back to the passage
  8. A negative of the renaming and separation is that the Qwikster.com and Netflix.com websites will not be integrated.Editorial · 8With hindsightThe post states the customer cost of the split plainly: two sites, two card entries, ratings that do not carry over. The benefits it lists fall mostly to Netflix’s own teams. The reversal later gave exactly this cost as its reason.SourceNetflix blog (Internet Archive copy)DVDs will be staying at netflix.com10 Oct 2011Back to the passage
  9. It is possible we are moving too fast – it is hard to say.Fact · 9With hindsightNetflix’s October letter answered the question: “What we misjudged was how quickly to move there.” Unique US subscribers fell to 23.79 million in Q3 2011, from 24.59 million in Q2.SourceNetflix, Form 8-K filed with the SECLetter to Shareholders (Exhibit 99.1), 24 October 201124 Oct 2011Back to the passage

What happened next

Dated events, each with its source. They are what followed the memo, not proof that it caused them.

  1. 1 mo later

    Hastings reverses the split: Netflix stays one website, one account and one password for streaming and DVDs, with no Qwikster.

    Netflix blog (Internet Archive copy)

  2. 1 mo later

    Netflix reports unique US subscribers down to 23.8 million and says it hurt its reputation and “stalled our domestic growth”. It says the retracted brand caused a temporary cancellation surge, minor next to the price change.

    Netflix, Form 8-K filed with the SEC

  3. 4 mos later

    Netflix reports domestic streaming up to 21.67 million members and DVD down to 11.2 million, with streaming net additions strongly positive in December.

    Netflix, Form 8-K filed with the SEC

  4. 5 yrs 7 mos later

    Netflix tells shareholders it added 5 million members in the first quarter and expects to cross 100 million members that weekend.

    Netflix, Form 8-K filed with the SEC

  5. 11 yrs 7 mos later

    Co-CEO Ted Sarandos announces Netflix will wind down DVD.com because the business “continues to shrink”.

    Netflix

  6. 12 yrs later

    Netflix mails its final DVD rentals.

    Engadget

The calls, against the record

Each claim in the memo’s own words, the evidence, and our reading of it. Verdicts are editorial.

  1. Held up

    “streaming and DVD by mail are becoming two quite different businesses, with very different cost structures”

    Evidence

    In Q4 2011 Netflix reported DVD and domestic streaming as separate segments: 52.4% contribution margin for DVD against 10.9% for streaming.

    Netflix, Form 8-K filed with the SEC

    Our reading Editorial

    The diagnosis held up, and Netflix reported the two as separate segments. What did not hold was separating them for customers: Netflix dropped the separate brand on 10 October 2011.

  2. Missed

    “In a few weeks, we will rename our DVD by mail service to “Qwikster”.”

    Evidence

    Netflix dropped Qwikster on 10 Oct 2011 and kept one website and one account.

    Netflix blog (Internet Archive copy)

    Our reading Editorial

    The plan was reversed outright. The sources do not say whether keeping the brand would have changed the business; Netflix itself rated the brand’s effect as minor next to the price change.

  3. Mixed

    “When Netflix is evolving rapidly, however, I need to be extra-communicative. This is the key thing I got wrong.”

    Evidence

    Netflix’s Q3 letter named members’ shock at the pricing changes as the “primary issue”, with the lack of explanation compounding it.

    Netflix, Form 8-K filed with the SEC

    Our reading Editorial

    In its next shareholder letter the company ranked price above communication. Better explanation might have softened the reaction; the sources cannot show by how much.

  4. Open

    “Companies rarely die from moving too fast, and they frequently die from moving too slowly.”

    Evidence

    Netflix said of its price move “What we misjudged was how quickly to move there”, yet by April 2017 expected to pass 100 million members.

    Netflix, Form 8-K filed with the SECNetflix, Form 8-K filed with the SEC

    Our reading Editorial

    A general claim that one company cannot test. Netflix survived moving fast, but by its own account it misjudged the pace, hurt its reputation and stalled domestic growth in 2011.

  5. Held up

    “DVD by mail may not last forever, but we want it to last as long as possible.”

    Evidence

    Netflix announced the wind-down of DVD.com on 18 Apr 2023 and mailed its final discs on 29 Sep 2023.

    NetflixEngadget

    Our reading Editorial

    DVD by mail continued until 2023 and closed because the business kept shrinking. Whether it lasted “as long as possible” cannot be checked.

Takeaways Editorial

  1. Apologise for the decision people are angry about

    The post apologised for the explanation and kept the price. Netflix’s own later account put price first, so an apology that leaves the cause untouched buys less than it costs.

  2. Separate the business before you separate the customer

    Different cost structures justified separate teams and separate reporting. They did not justify making customers manage two sites; the internal case and the customer case need testing separately.

  3. Do not stack two changes on one audience

    Netflix announced the rebrand while members were still reacting to the price rise, and later said it “further dented” its reputation. Let one change land before announcing the next to the same customers.

Practise the strategy skills in this memo

Socratify is an interview coach. Each link opens a practice session with this memo as the case; nothing is sent until you choose to start.