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Netflix: How to completely screw up

DVDs-by-email success story is losing customers...

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As recently as June, Netflix looked like one of the biggest consumer success stories in digital media. The company was already synonymous with DVDs-by-email, an idea imitated worldwide, and was bundling on-demand TV and movie streaming at an incredibly low price. By May, Netflix traffic had overtaken Bittorrent volumes in the USA. accounting for a quarter of US IP packets. After years of prattle, somebody had persuaded the mass market to pay for video on demand over the internet.

Netflix even announced a move into financing original drama – buying the rights to the UK political thriller House of Cards.

Then Netflix decided to unbundle its bundle – hiking prices 60 per cent. What previously cost $9.99 (for most new users this was presented as $7.99 for streaming plus $2 for the DVD option) now cost $16. Compared to physically renting discs from Blockbuster this is still a bargain, and Netflix's catalog is still far superior to the chainstore. but the size of the price hike stunned customers. Netflix's growth has flattened, and the company admitted last week that it was revising subscriber numbers downwards. Shares have fallen 45 per cent.

But it's the breaking of the bundle that is hard to fathom. Netflix not only said it would be presenting its customers with two plans, it would separate the two businesses. This weekend CEO Reed Hastings issued a grovelling apology.

"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," he wrote.

But Hastings also announced that the strategy would continue unchanged. The DVD business will be rebranded with a forgettable new name: Qwikster. Netflix and Qwikster sites aren't integrated, so if you can't find a movie to watch on streaming you have to search all over again for the DVD. If you rate a DVD, the rating will register on Qwikster, but not Netflix. And vice versa.

While it succeeds in signalling to the investors Netflix determination to make streaming its core business, the consequences of confusing and alienating customers may be high. What made Netflix feel attractive was price and choice - but also the bundle. If felt like a bargain. Now it feels like a curse.

Hollywood's ambitious idea – and Netflix is a supporter and member – is to sell licences rather than one-time admission fees to a stream, or plastic discs. For an UltraViolet member, it doesn't really matter. You'll buy a Blu-Ray disc and never take it out of its box – watching it through UV-compatible TVs.

It's potentially a huge, and positive change in the way we get stuff. But it's utterly mystifying to see NetFlix getting ready for this by irritating its customers, and making them painfully aware of the annoyances of digital media.

Is there some masterplan here we've missed? ®

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