New customer anger after Netflix apology

Posted: September 19, 2011

If the adage "Any publicity is good publicity" applied to publicly traded businesses, Netflix would be flying high today. Instead, the pioneer of DVDs-by-mail and Internet video delivery is struggling with its second storm of customer anger in less than three months and a stock price that has plunged more than 50 percent.

In July, Netflix Inc. announced what customers saw as a sudden 60 percent price increase: Netflix dropped its bargain $10-a-month price for subscribers who wanted both unlimited streaming and one as-long-as-you-want DVD rental, replacing it with two separate $8-a-month services.

Early Monday, Netflix chief executive officer Reed Hastings apologized - sort of - for the furious response. Then he did what some customers saw as doubling down. Hastings announced that the DVD-rental service would get a new brand name, Qwikster, as well as a separate web address and billing.

"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," Hastings wrote to Netflix subscribers. "That was certainly not our intent, and I offer my sincere apology."

Netflix's stock price has been up and down since its July peak of $304.79, but it is mostly down - all the way to Monday's close of $143.75, down $11.44, or 7.37 percent, from Friday's close of $155.19.

By 4 p.m., about 6,000 people had commented on Netflix's Facebook page, with critics appearing to far outnumber supporters. Some vowed to join the flight of customers that Netflix acknowledged obliquely last week when it said it expected to serve 24 million U.S. customers in the third quarter rather than the 25 million it projected in July.

"Two web sites? Two rating systems? Two places to search for a movie? You're dis-integrating your services? Seriously? You're disintegrating my loyalty too," said Facebook member Bruce Tong.

Analysts, some already critical of Netflix, gave mixed reviews to the company's maneuver, which also comes on the heels of word that Netflix will lose access to Starz movies when an earlier deal expires in February. Starz provides much of Netflix's most up-to-date streaming content.

"They're asking people to pay more for less," said Tony Wible, who follows Netflix for Janney Capital Markets and who lowered Netflix from "neutral" to "sell" six months ago. "It is possible that people will do that, but last week shows they may not."

Wible said the Internet-video business may indeed offer faster-growth opportunities, as Netflix has said. But Wible said that faster growth has also attracted much greater competition as well - including new rumors that Dish Network will soon launch a Blockbuster video-streaming service to go against Netflix.

Jeff Kagan, an Atlanta telecom analyst, told clients that the company could recover "if this is the only mistake Netflix makes."

"This is a great sign that if you don't do what the marketplace wants, you can turn from winner into a loser in a second," said Kagan, who said Hastings needlessly rocked a happy and loyal customer base. "This was not a man who has been a lifelong executive and CEO. This was an inventor who came up with a great idea and turned it into a success."


Contact staff writer Jeff Gelles at 215-854-2776 or jgelles@phillynews.com.

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