Netflix CEO Reed Hastings admitted Sunday night that the company fumbled its handling of recent price hikes to its most popular subscription packages.
However, the embattled home entertainment chief stopped short of scrapping the higher costs.
Instead, he said the company would split its DVD-by-mail business from its streaming service and re-christen it Qwikster.
So basically, Netflix keeps its unpopular price increase and will now force customers to subscribe to two separate services in place of one. Talk about a cup of salt with that tablespoon of sugar.
In his apology in an email to subscribers, and on the company blog, Hastings seemed to say all the right things — even if his actions may leave some customers even more ticked off.
"In hindsight, I slid into arrogance based upon past success," Hastings wrote.
"But now I see that given the huge changes we have been recently making, I should have personally given a full justification to our members of why we are separating DVD and streaming, and charging for both. It wouldn’t have changed the price increase, but it would have been the right thing to do," he added.
Hastings' unorthodox mea culpa comes in the wake of customer outrage that saw many members make good on threats to abandon the service over the higher prices.
It also comes just days after shares of the company plummeted on news that Netflix was shaving down its projected subscriber numbers for its upcoming quarter.
There will be no further increase to the already announced price hike for using both the company's streaming service and its disc business, but members who subscribe to both services will have two entries on their credit card statements, one for Qwikster and one for Netflix, Hastings wrote.
Andy Rendich, Netflix's chief service and operations officer, will be the CEO of Qwikster.
One downside of the renaming and separation is that the websites will not be integrated, meaning the popular customer review feature that gives users suggestions for films to watch won't translate across platforms.
It also means that one stop shopping will now become two stops — if customers want to watch a film they will have to check in two separate places to see if it is available by mail or via streaming.
Even Hastings wrote that the change could be jarring: "For me the Netflix red envelope has always been a source of joy. The new envelope is still that distinctive red, but now it will have a Qwikster logo. I know that logo will grow on me over time, but still, it is hard. I imagine it will be the same for many of you."
To help cushion the blow, Qwikster will offer users videogames via an upgrade, similar to the one Netflix subscribers can opt for in order to get Blu-rays.
Netflix has made no secret that its future financial health depends on transitioning subscribers from the costly DVD by mail business, where postage eats up profits, to the relatively cheaper streaming business. It appears that Hastings has used a crisis to accelerate that shift.
Indeed, Netflix is now a streaming only company. DVD lovers, get ready for Qwikster.
Here's a video featuring Hastings and Rendich explaining the new platform:
Here's the full text of the letter:
I messed up. I owe you an explanation.
It is clear from the feedback over the past two months that many members felt we lacked respect and humility in the way we announced the separation of DVD and streaming and the price changes. That was certainly not our intent, and I offer my sincere apology. Let me explain what we are doing.
For the past five years, my greatest fear at Netflix has been that we wouldn't make the leap from success in DVDs to success in streaming. Most companies that are great at something – like AOL dialup or Borders bookstores – do not become great at new things people want (streaming for us). So we moved quickly into streaming, but I should have personally given you a full explanation of why we are splitting the services and thereby increasing prices. It wouldn’t have changed the price increase, but it would have been the right thing to do.
So here is what we are doing and why.
Many members love our DVD service, as I do, because nearly every movie ever made is published on DVD. DVD is a great option for those who want the huge and comprehensive selection of movies.
I also love our streaming service because it is integrated into my TV, and I can watch anytime I want. The benefits of our streaming service are really quite different from the benefits of DVD by mail. We need to focus on rapid improvement as streaming technology and the market evolves, without maintaining compatibility with our DVD by mail service.
So we realized that streaming and DVD by mail are really becoming two different businesses, with very different cost structures, that need to be marketed differently, and we need to let each grow and operate independently.
It’s hard to write this after over 10 years of mailing DVDs with pride, but we think it is necessary: In a few weeks, we will rename our DVD by mail service to “Qwikster”. We chose the name Qwikster because it refers to quick delivery. We will keep the name “Netflix” for streaming.
Qwikster will be the same website and DVD service that everyone is used to. It is just a new name, and DVD members will go to qwikster.com to access their DVD queues and choose movies. One improvement we will make at launch is to add a video games upgrade option, similar to our upgrade option for Blu-ray, for those who want to rent Wii, PS3 and Xbox 360 games. Members have been asking for video games for many years, but now that DVD by mail has its own team, we are finally getting it done. Other improvements will follow. A negative of the renaming and separation is that the Qwikster.com and Netflix.com websites will not be integrated.
There are no pricing changes (we’re done with that!). If you subscribe to both services you will have two entries on your credit card statement, one for Qwikster and one for Netflix. The total will be the same as your current charges. We will let you know in a few weeks when the Qwikster.com website is up and ready.
For me the Netflix red envelope has always been a source of joy. The new envelope is still that lovely red, but now it will have a Qwikster logo. I know that logo will grow on me over time, but still, it is hard. I imagine it will be similar for many of you.
I want to acknowledge and thank you for sticking with us, and to apologize again to those members, both current and former, who felt we treated them thoughtlessly.
Both the Qwikster and Netflix teams will work hard to regain your trust. We know it will not be overnight. Actions speak louder than words. But words help people to understand actions.
-Reed Hastings, Co-Founder and CEO, Netflix
p.s. I have a slightly longer explanation along with a video posted on our blog, where you can also post comments.