Corporate humility can be a double-edged sword. When dealing with shareholders, it sometimes is essential that a company roll over and apologize for its choices, if for no other reason than to demonstrate it’s learned that recent earning strategies have failed. On the other hand, apologizing to disgruntled consumers dissatisfied with a product or service actually can hurt a company by further incensing the crowd — especially when that apology amounts to saying, “Tough luck.” And that is precisely the sort of apology Netflix (NASDAQ:NFLX) issued first thing Monday morning.
Considering that Netflix announced just last week that it lost around 1 million subscribers because of new subscription pricing — not to mention that the company’s stock has shed nearly half of its value since July — now might not be the time for humility. Now’s the time Netflix should be telling people how much good streaming content they’re getting for very little money and how investors shouldn’t worry — that everything’s going according to plan.
Two things happened in quick succession Sunday night. First, Netflix announced that, just weeks after separating streaming video and DVD rentals into separate subscription packages, the company would spin off its DVD rental business into a separate subsidiary with a new brand. Called Qwikster, the Netflix-owned operation will carry over all remaining disc-based subscribers and use the exact same pricing structure. It also will — in a first for the company — offer disc video game rentals for Microsoft (NASDAQ:MSFT), Sony (NYSE:SNE) and Nintendo‘s (PINK:NTDOY) respective game consoles for an additional fee.
The second thing that happened was Netflix members received an email from CEO Reed Hastings titled “An Explanation and Some Reflections” detailing exactly what Qwikster is, but more importantly detailing why the company has made so many changes to its business model in recent months. Hastings cited both AOL (NYSE:AOL) and Borders as businesses that failed to make meaningful transitions with their businesses as technology changed.
He went on to say that Netflix separated its streaming video and disc rental services precisely because they have become different businesses with different costs. He apologized to “those members, both current and former, who felt we treated them thoughtlessly” but he did not offer those customers any compensation for service they feel they’ve lost in the transition.
Hastings is right. Netflix did the smart thing in separating its disc and streaming video businesses into separate entities. One mistake was not changing the branding of the DVD service right out of the gate. There is evidence the decision to adopt the Qwikster branding was made quickly and recently. A Monday post at TechCrunch pointed out that the @Qwikster account on Twitter is controlled by a random user, which demonstrates that Netflix’s marketing team hadn’t quite gotten everything set up for the brand before its reveal.
It also was foolhardy to introduce multiple changes to its range of services in a short period of time. The changes needed to be made, though. Netflix’s DVD-only subscribers number 2.2 million — less than a tenth of the company’s nearly 25 million subscribers. The market for physical discs is only going to shrink during the next few years, and the company needed to phase out a business that ultimately will be anachronistic. By making the shift, Netflix also has started encouraging its content partners to stop bemoaning the loss of DVD sales and to start forming strategies about how to make the most out of streaming services.
Should investors be mollified by Hastings’ apology? Perhaps not. Watching shares sink from above $304 to below $160 in two months is bound to cause bitterness. Consider this, though: Netflix lost only 1 million total subscribers after the pricing changes. Some analysts were projecting the company would lose 2.5 million. Netflix has been prepared for this level of churn.
Now the questions are: Will Netflix’s recovery fit in with its expectations? And will customers accept the apology and stick with the company? We’ll have a better idea come the company’s next quarterly earnings report.