Netflix CEO Reed Hastings Talks Qwikster, Price Hike

The New York Times ran a fairly comprehensive story recently about Netflix’s recent troubles. Writers Nick Wingfield and Brian Stelter went over the quick introduction and sudden abandonment of Qwikster, as well as July’s 60 percent price hike.

I think they pinpointed exactly why people reacted so differently than CEO Reed Hastings and the Netflix staff expected. In short, they underestimated the psychological reaction to the decision.

For well over a year, all the signs seemed to indicate to Netflix that customers were ready to move quickly to a future in which movies and TV shows would come to them instantly over the Internet instead of in the mail. Mr. Hastings said the decision to form Qwikster, as the mailed DVD company was to be called, had been based in part on data that showed a faster-than-anticipated increase in streaming by its customers.

In the first quarter of this year, for the first time, DVD shipments were down year over year, leading Netflix to declare that the DVD business had peaked. “Very few” new subscribers were choosing to get DVDs in the mail, Mr. Hastings said.

The breakup announcement in September seemed “very data-driven,” said Rich Greenfield, a media analyst for BTIG Research. “I think the company thought, because many people aren’t watching the DVDs, let’s accelerate the transition.”

What the company seemed not to respect was the premium that consumers place on having options — even if they don’t actually take advantage of all those options. Just ask any all-you-can-eat buffet operator, or a gym owner who sells six-month memberships.

Given the financial and public relations shock waves caused by Netflix’s bad summer, it wouldn’t surprise me if Netflix ended up adopting an inverted version of their former marketing strategy in the coming years. As streaming continues to grow and DVD rentals continue to falter, it would make sense to re-merge the services, but this time with DVDs as the loss leader.

That’s years away, though. With the shell shock they’re bound to be experiencing right now, count on Netflix not making any sudden moves, especially financial ones, for a good long while.