Netflix (NFLX) faces customer backlash, weak economy

Netflix CEO Reed Hastings says "I messed up," but the apology doesn't appear to have calmed customers who are frustrated over the video firm's plan to raise prices by breaking its popular product in two.

A key reason: Mr. Hastings apologized about the way the decision was communicated, not the decision itself.

In in a blog post Sunday he held firm to a plan that promises to make video rentals more costly for millions of users. If those users remain Netflix customers, that is.

Now, users who have been using a bit of DVD-by-mail and also a bit of web-streaming video will see two separate bills, and a higher total price, than they paid before. The streaming service will retain the Netflix name, while the by-mail business will adopt the new name of Qwikster, Hastings announced in his communiqué.

Netflix (NFLX) stock fell on the news. The high-flying company has lost a quarter of its value in the past week as traders analyze the impact of the price increase.

Price hikes can be a hard sell for customers at any time. But it's particularly challenging at a time when the economy is weak, and millions of Americans are looking for ways to cut their monthly bills.

That's one of the reasons Netflix faces a customer backlash.

Here's one example of the feedback posted in the responses to the Sunday announcement: Ross Brandt wrote to Hastings that "you've financially drilled and disrespected your customer base with the cost increases, and now you are making it harder for them to manage their queues and basically charging them for it."

Ben Trentlage, in another response, writes: "So, to summarize: 'Oh we're so sorry. We didn't think anyone would notice that 60% price hike. To make it up to you, we'll decrease convenience by separating services.' "

Other customers said bluntly that they are dropping the service because, in their view, it is no longer worth the money.

Not all Netflix customers are seeing a 60 percent price hike, but that's the boost for people who want to continue to have access to both streaming and DVD rental (which is now $15.98 per month, up from $9.99).

Netflix itself has estimated that its customer base is declining by about 1 million people during the current quarter, which ends Sept. 30.

Pricing is far from the only customer concern. Many users are complaining equally, or even more loudly, about a cheapened user experience as the service splits from one product into two.

An oft-heard lament: Instead of going to one "movie" company, users are now being asked to search separately for DVD and streaming content.

But the price and convenience factors are intertwined. By changing its business model, Netflix is giving many customers a reason to rethink that monthly bill – at a time when many families are trying to think creatively about how to save money.

Some 40 percent of Americans have reduced their spending in the past 60 days, finds one new poll conducted for the financial firm Bankrate.com. That estimate is based on 1,000 interviews with Americans in a representative sample of the overall population. The downshift has been driven by negative economic news and a shaky stock market.

Although many people aren't cutting back on entertainment spending, a goodly number are.

For example, a tally by the Associated Press found that eight large subscription-TV providers lost 195,700 subscribers in the April-to-June quarter.
Netflix on one level stands to benefit from any erosion in traditional cable service.

But with its new strategy, Netflix is now under its own pressure, as consumers look more closely at rivals from Roku to Amazon.com and Hulu.com.

Just because there's a customer outcry doesn't necessarily prove that Hastings has made a strategic blunder. Plenty of companies have imposed price hikes and repositioned their products, suffered some initial setbacks, and gone on to prosper.

It's possible that Netflix is making a well-calculated trade-off.

Bill Gurley, a partner at the venture capital firm Benchmark Capital, writes that "the price move was not a 'decision,' so much as a 'reality' presented to Netflix from the content owners in Hollywood."

His hunch is that, with Hollywood production companies asking for more money for rights to stream their content, Netflix is splitting in two in order to bargain for lower costs. Netflix can say that fewer people (just those customers that choose to pay for its streaming business) have access to the content.

Whatever the details, here's the way Hastings put it in his apology:

"We realized that streaming and DVD by mail are becoming two quite different businesses, with very different cost structures, different benefits that need to be marketed differently, and we need to let each grow and operate independently."