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Netflix drops plan to separate DVD-by-mail from online streaming

The surprise reversal, which some liken to the 1985 'New Coke' misstep, follows the company's unpopular 60% price increase in July for subscribers who watch both DVDs and online video.

October 10, 2011|By Dawn C. Chmielewski, Los Angeles Times
  • Reed Hastings, chief executive officer and president of Netflix Inc., said Monday that he decided to scrap a proposal to create a stand-alone DVD service under a new name, Qwikster.
Reed Hastings, chief executive officer and president of Netflix Inc.,… (David Paul Morris, Bloomberg )

Attempting to heal its self-inflicted wounds, Netflix Inc. said it would abandon its controversial plan to separate its DVDs-by-mail business from its online streaming service.

The surprise reversal, coming three weeks after the plan was disclosed, follows the company's unpopular 60% price hike in July for subscribers who watch both DVDs and online video.

The changes led the Los Gatos, Calif., company to predict it would lose 600,000 U.S. subscribers for the third quarter, instead of gaining as many as 400,000 as it previously forecasted.

Netflix Chief Executive Reed Hastings said Monday that he decided to scrap the proposal to create a stand-alone DVD service under a new name, Qwikster. He said having two distinct subscription businesses — with separate billing and recommendations — would be too difficult for customers, who craved simplicity.

"This means no change: one website, one account … in other words, no Qwikster," Hastings wrote in a blog post and email to customers.

Though the decision to preserve its single service may appease consumers, industry observers say it may take Netflix awhile to win back disaffected customers still angered over the price increase.

"Given the amount of negative news flow around recent company-initiated actions — including the price change, which remains in effect — we believe it could take some time for consumers to come back to Netflix," Anthony J. DiClemente, a media analyst with Barclays Capital, wrote in a report Monday.

Hastings said the company's price hike, which was instituted to pay for the rights to more movies and television shows, "was necessary" — signaling that it will remain in place.

More than half of Netflix's 25 million subscribers were affected by the new pricing. In September, Hastings acknowledged that he "messed up" in how he announced the price changes and apologized for what he termed a lack of respect.

Netflix needs to keep expanding its content as it faces increased competition from such rivals as Amazon.com, Hulu and Dish Network Corp.'s Blockbuster, which recently launched an online subscription service.

One marketing expert said Netflix's handling of its price increase, and the decision to break apart its subscription business, may be the biggest marketing misstep since 1985, when the Coca-Cola Co. introduced "New Coke," a new formulation of its popular carbonated beverage.

"I put this right up there," said Peter Sealey, who served as chief marketing officer of Coke in the 1990s. He said that while it took Coke three months to "reverse course," Hastings "did it quicker."

Experts say people are suspicious of companies that make sudden moves without involving the customer.

"I think [Netflix] will get it back eventually if they do all the right moves, but it's going to take a little while," said Ira Kalb, an assistant marketing professor at USC's Marshall School of Business. "It's a trust issue."

Netflix's "visible waffling" will probably hurt the company's growth in the U.S. market in the near term, wrote Barton Crockett, an entertainment analyst with Lazard Capital Markets.

Thousands of people responded on the company's blog to Hastings' decision to kill Qwikster. Some thanked him, while others attacked him personally.

"Finally, someone at Netflix listened to reason and to the customers," wrote Lori Burelle of Meridian, Idaho. "I was telling my mom yesterday that I was going to cancel after a 6-year relationship. Now it looks like I will be staying, at least for now."

The parody website the Onion published a bogus news brief about the service's next move: "Netflix Switches Over to Convenient New Physical Locations."

Negative consumer reaction has taken its toll on Netflix, which has lost $9.8 billion in market valuation since its July 13 peak. On Monday, the company's stock sagged to a 52-week low, closing down $5.59 to $111.62.

dawn.chmielewski@latimes.com

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