Not So ‘Qwik,’ Netflix

Last month, Netflix announced that it was planning to split into two businesses: The company would continue offering subscribers streaming content, while a new service, “Qwikster,” would manage mail-order DVDs.

But Qwikster died a fast death. Today, Netflix announced that it was going to backtrack on its strategy to divide up its services. In a statement, CEO Reed Hastings noted: “Consumers value the simplicity Netflix has always offered, and we respect that. There is a difference between moving quickly — which Netflix has done very well for years — and moving too fast, which is what we did in this case.”

Hastings’ comments reflect the volume of criticism the company has received since it announced its plans on September 18. According to The New York Times, “tens of thousands spoke out against the plan on Netflix’s web site and [other sites]” following the announcement — which came on the heels of price increases for streaming and DVD rental services that already had Netflix subscribers on edge.

The deluge of complaints was perhaps no surprise. Wharton marketing professor Raghuram Iyengar points out that having a separate mail-order operation would be “extremely burdensome” for consumers in multiple ways. “They would have to sign up for two different services for getting the DVDs and streaming. Most companies try to bundle services rather than spread them apart. In addition, there are no price discounts if someone signs up for both services. Again, this is quite contrary to discounts given to bundled services.” There are also “higher mental costs,” he adds. “Consumers would have to create two separate movie lists for their DVD and streaming options.”

Kartik Hosanagar, a Wharton operations and information professor, agrees. “The decision to abandon the plan feels like the right one at so many levels. Netflix, to most of its users, combines the best of offline and online methods of watching movies. That is part of its appeal. There are no structural or operational inefficiencies tied to combining both channels under one roof. So, the Qwikster [addition] was unjustified to Netflix’s users.”

What is notable in this case, however, is that those “tens of thousands” of unhappy voices got through to Hastings and other Netflix executives — and very quickly, thanks to social media. “Today’s decision by Netflix merely acknowledges that the management is listening to [the service's] users,” Hosanagar says. “Twenty years back, a poor decision such as the [addition of] Qwikster would have resulted in consumers slowly dropping out of the service and moving on. The firm would have found out about its poor decision too late. Today, Netflix makes a decision, consumers react instantaneously on twitter and Facebook, and Netflix can assess mass user reaction instantaneously and reverse its poor decision. That’s the power of social media.”

What will be the next twist in the Netflix plot? According to Iyengar, the company may try changing its pricing for the streaming option. “The current flat fee — ‘all you can eat’ — pricing for streaming will be extremely difficult to maintain,” he says, adding that the company might scale its pricing according to the number of movies subscribers want to see, or the type of content — for example, older films versus first-runs.

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