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What Netflix Needs to Learn From Amazon

http://www.fool.com/investing/general/2011/09/20/what-netflix-needs-to-learn-from-amazon.aspx

Seth Jayson
September 20, 2011

Like many others, I took a shameful pleasure in watching Netflix (Nasdaq: NFLX  ) CEO Reed Hastings' sad-yet-hilarious bungling of yet another major service change. Not satisfied with its recent, customer-alienating moves of jacking up prices 30% to 60% on long-time members -- and reaping a big drop in membership along with a huge fall in stock price -- Netflix had, Hastings said, finally decided to make amends.

The peace offering? A long-winded explanation that the price increase was actually part of an even bigger company initiative, one that will split the subscriber experience in two. Hastings explained that the disc business will abandon a decade's worth of branding to rename itself the horrible "Qwikster," while the smaller streaming catalog will keep the Netflix brand. Best of all, and worst of all, the service site would be split in two! No more automatic or simplified moving content from one side to the other! Now, members could not only pay more, but do more work, run content searches multiple times, and juggle extra URLs to organize and expand their daily dose of online-enabled entertainment. And the split will be good for the business, which has different needs and a different cost structure! How awesome is that? Guys? Awesome!?

Hastings is finding out.

Pride increaseth after a fall
Hastings wrote that he believed past success had helped him slide Netflix into arrogance, yet his apology seemed to me to be a lot more arrogant than the price increase. A price increase is, at least, impersonal. Not so, the splitting of the business and the way the announcement was handled.

Subscribers -- especially those getting DVDs -- identify with the Netflix brand. To them, Netflix has for years been a trusted companion in entertainment, helping them enjoy themselves in ways beyond the narrow parade of box-office-topping drivel that they could get on demand from much reviled cable companies like Comcast (Nasdaq: CMCSA  ) , Cox, and Verizon (NYSE: VZ  ) . For loyal members, waking up to see the disc business tossed aside and given a moniker reminiscent of a toilet bowl cleaner is like waking up to find out their favorite, fun, hip friend has taken a middle management job at Staples and doesn't want to hang out anymore because his new friends -- the streamers, the ones who don't mind a small catalog filled with sub-par entertainment choices -- are much cooler, and they're the wave of the future anyway. (But don't worry, you can hang with my cousin Kletus, here. He's hip, I swear, and he wears the same clothes as I do.)

Netflix seemed to understand the intimate nature of this relationship, but not enough to do things right. While I've never been a huge Netflix promoter, even I was stunned by the clumsy way Netflix tried to deliver the breakup note.

The announcement was delivered to subscribers like me as if it were an email from Hastings himself. It was written in a very personal tone, beginning with what seems like a direct apology, "Dear Seth, I messed up. I owe you an explanation." The return address in the email didn't read "Netflix," but was ginned-up to look as if it came from Hastings' own email account. Yet, if you hit "reply" as I did, and typed a note back, you were treated to a bounceback, no-reply email, revealing that this wasn't a personal apology from Hastings (granted, with a large CC list). Instead, it was corporate damage control masquerading as personal communication, and it was designed to be the end of the discussion -- at least so far as your inbox was concerned.

At least we mere plebs were invited to take our concerns to a Netflix blog page, the proper venue for such rabble, I suppose. There, incredibly, Hastings continued to alienate members by only responding to the minority of posters who praised Netflix, ignoring the majority of the comments (now more than 22,000), most of which told him that he screwed up big time.

Wall Street vs. Main Street
And therein we find a strange divergence. While members seem overwhelmingly negative on this decision, a plurality of opinion (that I have read) from stock and business wonks is that this is somehow a good decision. Why the difference? Because investors and Netflix subscribers have different needs, and Netflix is catering to Wall Street now.

Sure, subscribers hate the idea of splitting the business in two like this: They no longer get a unified browsing experience between discs and streaming. They don't know if the ratings they spent so much time entering over the years will propagate to the new sites.

A lot of investing and business wonks, on the other hand, see another bit of sheer genius! Split the businesses apart! Let independent management on either side run things as they see fit! Empowered teams dedicated to bettering their specific portion of the business will innovate, blah blah blah, shareholder value, individual strengths, boo boo boo, still harvesting synergies ... I've read all that. I get the logic. But I don't buy it. And I don't think it's a slam-dunk way to increase shareholder value in the short or long term.

The best structural and managerial maneuvers in the world don't matter when you alienate and anger your members so much that tens of thousands of them take the time to get online to tell you how bad you've screwed up. Many of them are discontinuing the service, and the breakup isn't that bad because there are a lot of options out there: Amazon (Nasdaq: AMZN  ) instant video, Hulu, Crackle, Wal-Mart's (NYSE: WMT  ) Vudu, Microsoft's (Nasdaq: MSFT  ) underrated Zune offerings on Xbox 360, and, of course, Apple's (Nasdaq: AAPL  ) iTunes.

What would Amazon do?
When I try to imagine the biggest beneficiary of Netflix's self-inflicted wounds, the name that comes to mind is Amazon. I can't help but think that Jeff Bezos and the rest of his team are smiling broadly as Netflix drives its hard-won user base into Amazon's alternatives. I try to imagine Amazon making a massive business and PR blunder like this, and I can't see it happening.

That's because Amazon, quite clearly, seems to understand how to win in the competitive beast that is the online world. In the end, it's a little bit about price and a little bit about the Web experience, but more and more, it's about the simplicity, stupid.

Why do people like me buy everything from books to TVs to l