Two Companies: Netflix Divides Itself

On Sunday evening, the chief executive of Netflix announced that the company would cut itself in two. Reed Hastings said the DVD-by-mail business would become a separate service called Qwikster, while streaming would keep the Netflix name. The split was the climax of a summer of fury from subscribers who had watched their bills rise and their loyalty tested. The company that had built the modern mail-order movie business was now telling the world that its future lay elsewhere. The reaction came fast, and it was not kind. This is the September 2011 story, and the story is the lesson: ...

Two Companies is the subject of this article: the moment Netflix told its customers that streaming and DVDs were different businesses, and the world told Netflix what it thought of that idea. The announcement is the anchor, the reaction is the drama, and the lesson is about how a company talks to the people who pay it.

1. The Sunday Evening Letter

The news broke at the end of the weekend, in the way bad news often does. The DVD business would operate under a new name, Qwikster, with its own website, its own queue, and its own identity. Netflix would keep the streaming brand and the streaming future. The split was meant to happen in the coming weeks, once the details were in place. Hastings framed the move as clarity, as focus, as two businesses that deserved to stand alone. The letter was long, personal, and defensive in places. It read like the reasoning of a man who believed the logic was obvious.

The timing made the letter harder to swallow. Netflix had already spent the summer explaining a price increase that angered millions of customers. Now, before the summer's dust had settled, the chief executive was telling those same customers that the service they had paid for was being divided into two services, each with its own price and its own habits. The announcement landed on a Sunday evening, when the news cycle is quiet and the commentary is loud. By Monday morning, the story was everywhere, and the tone was not forgiving. The company had wanted a clean announcement. It received a public reckoning instead.

2. The Summer That Came Before

The split did not come from nowhere. On July 12, Netflix had raised its prices by about sixty percent for customers who wanted both DVDs and streaming. The old plan bundled the two together at one price; the new world charged separately for each. The increase was the first big price move in the company's modern history, and the customers reacted as customers do. Hundreds of thousands of subscribers canceled their memberships over the following weeks, and the numbers were reported in the press with alarm. The company's own forecasts had expected some churn. The actual exodus was worse.

The stock market delivered its own verdict. Netflix shares had traded near three hundred dollars in July, buoyed by years of subscriber growth and the streaming narrative. By mid-September, the shares had fallen toward one hundred thirty dollars, a decline of more than half in about two months. Every cancellation figure, every analyst note, every headline about angry customers pushed the price lower. The company that had been the darling of the digital transition was suddenly the cautionary tale of pricing power misused. Hastings watched his market value shrink while insisting the strategy was right. The tension between those two facts would not resolve itself.

3. The Reasoning

Hastings had an argument, and he made it in his own words. Streaming and DVDs, he wrote, are different businesses with different economics and different futures. DVDs are a physical product, a logistics operation, a declining but profitable franchise that still sent envelopes through the mail. Streaming is a digital service, a licensing business, a platform for the long run. Trying to run both under one brand, one website, and one queue forced compromises on both. Separating them, he argued, would let each business focus on what it did best and let customers judge each service on its own terms.

The reasoning had a certain internal logic. Companies split divisions all the time, and investors often reward focus. But the letter also revealed how Hastings saw the world: the future is streaming, and DVDs, while they may last a long time, are the past. That conviction was probably right as a prediction. As a message to customers, it was brutal. The chief executive was effectively telling the people still renting DVDs that their favorite part of Netflix was a legacy business being pushed out of the nest. Logic does not soothe a customer who feels demoted, and logic does not stop a stampede of cancellations.

4. The Name

Then there was the name. Qwikster. The word was meant to evoke speed, convenience, and the quick turn of a mail-order envelope. To the public, it sounded like something else: a comic character, a breakfast cereal, a brand designed by a committee that had never met a human being. The press had a field day. The jokes wrote themselves, and the internet was happy to tell them. A company that had built one of the most beloved consumer brands in technology was now asking customers to trust a name that sounded like a toy. The announcement was a gift to headline writers, and they spent the week unwrapping it.

The separate queue made it worse. Customers who wanted both DVDs and streaming would have to manage two accounts, two logins, two queues, and two bills. The convenience that had defined Netflix, the single envelope and the single click, was being dismantled in the name of focus. The product people had loved was being replaced by two products they had not asked for. Every detail of the announcement seemed designed to confirm that the company had lost touch with how its customers actually lived. The brand, the price, and the product were all moving at once, and none of the moves were popular.

5. The Reaction

The reaction arrived in three waves. Customers were angry, and they said so loudly on the forums, on Facebook, and in the comment sections that had become the public square of the consumer internet. Analysts were confused, and their notes reflected it, with price targets cut and questions raised about the strategy and the communication. The media were merciless, and the coverage framed the split as one of the worst strategic communications blunders of the year. A company that had been celebrated for its culture and its customer obsession was suddenly the object of universal ridicule. The fall from grace took about ten weeks.

The ridicule had a pattern worth noticing. The jokes about the name were funny, but the anger underneath was real. Customers felt betrayed by the price increase, and the split felt like the company rubbing salt into the wound. Hastings had explained the logic, but he had not apologized, and the difference mattered. The press noted that the announcement had no apology in it, no acknowledgment that the summer had damaged trust, no plan to win the customers back. The company behaved like a business explaining itself to shareholders. The customers wanted to be treated like partners. Those two audiences were hearing two different messages.

6. The Market

The market had already voted in July, and it kept voting through September. The shares fell from the summer peak toward one hundred thirty dollars by mid-September, and the split announcement did nothing to stop the slide. Analysts cut their targets and their ratings, and the chatter turned from growth to execution risk. The company's own story had changed: from the disruptor that made Blockbuster irrelevant to the incumbent that could not manage its own customers. The stock price is a crude instrument, but it is a fast one, and it told Hastings that the market did not share his confidence in the plan.

The financial logic of the split was itself questioned. Streaming was growing and would keep growing, but it was also expensive, with licensing costs rising and competition coming from Amazon and others. DVDs, by contrast, were profitable and cash-generative, and they subsidized the future the company wanted to build. Splitting them off meant the streaming business would have to stand on its own financial feet sooner, with less support from the profitable mail machine. The strategy might have been right for the long run, but the timing, the price increase followed by the split, could not have been worse. The bill for the summer was still being paid.

7. The Lesson

The lesson of the Qwikster week is not that splitting businesses is wrong. Splitting businesses is often right, and focus is a legitimate strategy. The lesson is about communication, sequencing, and trust. Netflix changed the price, then changed the structure, then changed the brand, all within a single summer, and each change was announced as a decision to be accepted rather than a journey to be shared. The company told its customers what was happening, but it never told them why it mattered to them. In the absence of that story, the customers wrote their own, and the story they wrote was about greed and carelessness.

There is a second lesson, about the asymmetry of brand. Netflix had spent years earning trust by being easy, by being fair, by making the mail come faster and the streaming start sooner. That trust was a reservoir, and the summer drew it down. The split, the name, the queue, the price: each decision was defensible on its own, and together they told a story of a company that had stopped listening. Brand is the sum of the promises kept, and a company that breaks three promises in one summer should not be surprised when the customers count. The reservoir refills slowly, and only with new promises kept.

8. The Future

The future, as Hastings saw it, was streaming, and the future was probably right. The DVD was not dying overnight, but its arc was clear, and the mail operation would eventually shrink into a niche. Streaming, meanwhile, was the direction of the entire industry, from television to film to the living room. The company's bet on the digital future was not the problem. The problem was the way the bet was communicated to the people who had to fund it. A company can be right about the future and still lose the present, and Netflix spent the autumn of 2011 learning exactly how that happens.

The weeks ahead would show how the story continued, but the shape of the lesson was already visible in September. Customers will forgive a price increase if the value is clear. They will forgive a restructuring if the story is honest. They will forgive almost anything except the feeling that they no longer matter. Qwikster was the moment Netflix made millions of customers feel like an afterthought, and the anger that followed was the market price of that feeling. The split would stand or fall on its own merits, but the trust would take longer to repair, and no name, however clever, could fix that.

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