Lessons in leadership from Netflix CEO Reed Hastings

Netflix chooses an uphill battle

Netflix recently split their streaming services from their DVD mail delivery services and increased the prices, but have upset many by completely splitting the services, even spawning a new company for the DVD deliveries, Qwickster. Although the price for the services combined was relatively low, low enough for many people to ditch cable in favor of Netflix, many consumers felt blindsided by the split. Netflix has taken a lot of heat for a relatively insensitive and sudden move that came with a blasé attitude from corporate.

As of publication, a commenter on Netflix’s blog had 580 Facebook likes for his comment, “This is great news! My dentist just did the same thing. It’s so much better. Now when I have cavities on my top row of teeth I go to one dentist, and when I have cavities on the bottom row, I go to the other dentist across town. Sure it’s frustrating that sometimes they can’t access my dental records that used to all be in one place, and yes I admit that it seems strange that they now charge me almost twice as much for the exact same dental care I received six months ago…but they are innovators! Besides, what choice do I have? They’re the only two dentists around. Well done Netflix! If it ain’t broke then don’t fix it. Simply hike the price, alienate your customer base and complicate your user interface under the guise of “progress”. Kudos.”

Popular parody of the situation

The Netflix move is mocked by TheOatmeal.com as follows:

An apology letter

Whether they knew or cared about the situation, every Netflix subscriber got this personalized email in their inbox this morning:

Subject: An Explanation and Some Reflections

Dear Lani,

I messed up. I owe you an explanation.

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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.

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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.

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Respectfully yours,

-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.

Lessons in leadership

Netflix has taken it on the chin, no question. Most companies are so stubborn that they can’t see past their business decisions into the homes of consumers they have upset. Most companies handle situations like this the exact same way Netflix initially did- without sufficient explanation and despite feeling that it was a good long term move, there was no sensitivity to the desires of consumers. Most people say that the pricing is no problem, they would happily pay more for Netflix services, but they didn’t feel as if they were asked before the price change and structure change hit.

People will still be hard on Netflix and lament how insensitive the company is, and some will call the flop an unforgivable sin, but we find that to be irrational. Reed Hastings put his personal name on an email to all subscribers, took responsibility, apologized, explained further, and humanized the entire experience by giving insight into his personal feelings on the matter. It is easy to be mad at a company, they have no faces. It is much more difficult on a human level to blatantly hate when someone tells you what the growing pains look and feel like, followed by multiple apologies and a promise to earn back trust.

Had Hastings and the team handled the situation with language such as this from the beginning, the price hikes would have ruffled feathers for a week and everyone would have moved on. Good leaders take credit for company failures apologize in public rather than stick to their guns. Quality leaders constantly assess a situation and are willing to take a new approach. Great leaders invite people to comment openly on their site, even if out of anger.

Hastings’ letter is not the end of the saga, and Netflix has a lot of cleanup left to do (especially given the fiasco that @Qwickster on Twitter is already taken by a pot smoking Elmo, oops), but this is a step in the right direction and one that we as subscribers can understand, relate to, and begin to forgive.