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 its 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 companys stock has shed nearly half of its
value since July now might not be the time for humility. Nows the time Netflix
should be telling people how much good streaming content theyre getting for very
little money and how investors shouldnt worry that everythings 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 theyve 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 Netflixs
marketing team hadnt 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.
Netflixs DVD-only subscribers number 2.2 million less than a tenth of the
companys 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 Netflixs recovery fit in with its expectations? And will
customers accept the apology and stick with the company? Well have a better idea
come the companys next quarterly earnings report. As of this writing, Anthony
John Agnello did not own a position in any of the stocks named here. Follow him
on Twitter at
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