Netflix: Flirting With Disaster?

A couple months ago, Netflix took flack for raising their prices for their subscription services. While they took heat, the company raised prices to deal with the growing cost of increasing the content available for their customers. It was a necessary move to grow the business.

Yesterday, Netflix announced that it was separating its DVD-by-mail services and its Internet movie-streaming service:

In his overnight email to the company's 23 million domestic subscribers, Mr. Hastings said the DVD business will be renamed Qwikster, hived off into a separate subsidiary that will have its own billing system, website and list of movies.

Now, I think that the DVD business is becoming somewhat archaic as we move towards a more digital world with cloud computing becoming more prevalent. With that said, there is still a demand for it, and I don't see that separating the businesses is a smart idea. It would be, if the customers were mutually exclusive in terms of online streamers versus DVD renters. This does not appear to be the case.

The outrage was immediate, as more than 16,000 users responded on Netflix's blog:

"You are making things significantly worse for us," one customer wrote, in a screed that echoed many of the others. "Now not only will we have to pay a LOT more for your services, but we will also have to access two separate websites."

Netflix is taking a long-term view, and as a result, they are taking a short-term drubbing. This is taking place both from their customers and their investors. Let's look at their customers first:

But what sealed the deal was Sunday night's so-called apology -- your mea culpa for the price hike. But you don't rescind the price hike?! Even worse, you announce proudly that you're creating an entirely new service to handle the DVD mail business, Qwikster?

So now, I have to go to one site to see if a movie is streaming, and if not, go to another site to put it in my by-mail queue to wait for a hard disc.

It's clear you don't care about keeping me happy, like you once did. I don't feel so proud being caught with that little red envelope anymore.

Clearly, these decisions were driven by what the company sees for the business. While it does make long-term sense, I think they're underestimating the good will they had generated for the brand by being the people's DVD and online streaming company. Now they're in hot water. The investors are getting out:

After a tremendous rally, that even my dad took note of and lamented not getting in on, the company has taken a huge hit over the last month. Even though the market as a whole has taken a hit, it certainly has not taken as big a hit as Netflix. The company has lost more than half of its shareholder equity in the last two months.

For me, the number one thing about business is knowing how customers are going to react to your business decisions. It is this understanding that shows that a company will succeed. You look at Apple and you see how a company with a strong understanding of its consumer has succeeded. Netflix has demonstrated an increasingly poor understanding of its consumer's needs and stands to suffer as a result.

While I strongly agree that the streaming business is the future, I think neglecting or complicating the DVD business is a poor decision. One of the main influences of technology has been to consolidate business activity. This is doing the exact opposite. While it may help Netflix tackle the content gap in the streaming business by separating the two businesses, this could have been executed much better. Additionally, I would have to question the timing, given the bad publicity that the price hikes garnered.

Time will tell whether Netflix will remain a strong company, but at the moment, you cannot like the direction it is going as a consumer and/or an investor.