IN JULY 2011, NETFLIX WAS THE UNDISPUTED U.S.

MARKET
LEADER FOR BOTH DVD RENTALS AND ONLINE MOVIE STREAMING.
ITS CUSTOMER BASE OF OVER 26 MILLION SUBSCRIBERS GENER-
ATED REVENUES OF $789 AND NET INCOME OF $68 MILLION.
ITS SHARE PRICE HAD REACHED AN ALL-TIME HIGH OF $298,
COMPARED WITH $7.83 IN 2002 (+3 800%, OR A 39% AVERAGE
ANNUAL GAIN OVER NINE YEARS).
ON JULY 12, NETFLIX ANNOUNCED IT WOULD BE
SPLITTING ITS DVD RENTAL BUSINESS FROM ITS
ONLINE MOVIE STREAMING SERVICES. INSTEAD OF A
COMBINED SUBSCRIPTION THAT GAVE CUSTOMERS
TWO DVDS AT A TIME, PLUS UNLIMITED STREAMING
FOR $9.99 MONTHLY, CUSTOMERS WOULD NOW
SIGN UP FOR UNLIMITED DVD RENTALS FOR $7.99
MONTHLY AND UNLIMITED STREAMING FOR AN
ADDITIONAL $7.99 PER MONTH.
1
BUT ON JULY 11, 2011, NETFLIXS
CUSTOMER-SERVICE EMPLOYEES RE-
CEIVED AN ANNOUNCEMENT FROM
THEIR SUPERVISORS, DESCRIBING A MA-
JOR CHANGE IN NETFLIXS BUSINESS
MODEL. A PRICE INCREASE WOULD
COINCIDE WITH THE CHANGE, SO THEY
WERE TOLD TO EXPECT CALLS AND
SOME ANGRY CUSTOMERS.
THIS ANNOUNCEMENT TRIGGERED
IMMEDIATE MASSIVE, AND ANGRY
CUSTOMER PROTESTS. ON NETF-
LIXS FACEBOOK PAGE, MORE THAN
10 000 MOSTLY NEGATIVE COM-
MENTS APPEARED. A NEGATIVE
" DEAR NETFLIX " TWITTER STREAM
SOON FOLLOWED.
IMD32250
Professor Stefan Michel prepared this case as
a basis for class discussion rather than to illustrate either
effective or ineffective handling of a business situation.
Copyright 2013 by IMD, Lausanne, Switzerland.
Not to be used or reproduced without permission.
Illustration by Sarah von Blumenthal
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Distributed by The Case Centre North America Rest of the world
www.thecasecentre.org t +1 781 239 5884 t +44 (0)1234 750903
All rights reserved f +1 781 239 5885 f +44 (0)1234 751125
e info.usa@thecasecentre.org e info@thecasecentre.org
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NETFLIXS SPOKESMAN STEVE SWASEY CONFIRMED THAT NETFLIX HAD
PREPARED EMPLOYEES TO RECEIVE A CERTAIN AMOUNT OF CALLS FROM
THOSE CUSTOMERS UNHAPPY WITH THE HIKE. SWASEY SAID NETFLIX DID
NOT GO INTO THIS CHANGE WITH ITS EYES CLOSED.
NETFLIX HAS CHANGED
THE POLICY RULES.
PLUS I JUST THINK
THE STREAMING SERVICE
IS REALLY BAD
COUPLE IN THE KITCHEN.
I LOVE
STREAMING
MOVIES. BUT
THE SELEC-
TION IS MUCH
SMALLER THAN
FOR DVDS.
THEY CALL IT UNLIMITED RENTALS, BUT ITS TWO DVDS AT
ONE TIME, AND IT TAKES TWO DAYS TO COME IN THE MAIL.
I MEAN, I LOVE DAVID LYNCH, BUT STILL I HAVE NO IDEA
WHEN DUNE DISAPPEARED OFF INSTANT STREAMING.
I BARELY KNEW WHEN TWIN PEAKS BECAME AVAILABLE.
WHY CANT
NETFLIX JUST TELL
ME WHEN THE CON-
TENT I AM INTERESTED
IN IS AVAILABLE?
I LIKE TO HAVE
MY DVDS AND WATCH
THEM WHENEVER I WANT.
THE KIDS PREFER ONLINE
STREAMING. WE REALLY
LOVED THAT ONE-STOP
SHOPPING AND WE ARE
NOT GOING TO PAY
60% MORE !
WE TESTED, WE RESEARCHED, WE ANALYZED.
WE KNEW WHAT THE REACTION WOULD BE. WE ARE NOT SURPRISED.
WE KNEW THAT THERE WOULD BE SOME PEOPLE UPSET BY THE SERVICE
AND WITH THE PRICE BEING ADJUSTED.
AND INSTEAD OF $9.99 WE PAY $15.99
FOR THE SAME MOVIES AND GET TWO
BILLS ? THATS JUST RIDICULOUS!
MARKET RESEARCH INDICATED THAT 10% OF NETFLIXS
CUSTOMERS RENTED DVDS ONLY, 40% ONLY STREAMED
MOVIES, AND 50% WERE HYBRID CUSTOMERS WHO RENT-
ED DVDS AND STREAMED MOVIES ONLINE.
2
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3
RICH GREENFIELD, A WALL STREET ANALYST WITH BTIG RE-
SEARCH, COMMENTED :
ON JULY 20, 2011, NETFLIX SENT OUT APOLOGY LETTERS
ADDRESSED PERSONALLY TO EACH SUBSCRIBER:
THERE WAS SIMPLY
NO PROMO OR "SAVE"
TECHNIQUE TO OFFER US
A DISCOUNT TO RETAIN
OUR BUSINESS. THIS
WOULD ILLUSTRATE THAT
NETFLIX IS SIMPLY NOT
CONCERNED WITH LOSING
CUSTOMERS.
3
Dear Stephan,
I messed up. I owe you an explanation.
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.
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.
Its 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 "Netix" 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.
A negative of the renaming and separation is that the Qwikster.com and Netix.com websites
will not be integrated. There are no pricing changes (were 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 Netix. The total will be the same as your current charges.
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 Netix teams will work hard to regain your trust. We know it will not be over-
night. Actions speak louder than words. But words help people to understand actions.
Respectfully yours,
Reed Hastings, Co-Founder and CEO, Netix
p.s. I have a slightly longer explanation along with a video posted on our blog, where you
can also post comments.
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IN THIS REMARKABLE AND LONG APOLOGY LETTER, NETFLIXS CO-
FOUNDER AND CEO REED HASTINGS HAD DISCREETLY LAUNCHED
A NEW BRAND, QWIKSTER. HE PLANNED TO RETAIN THE NETFLIX
BRAND FOR THE GROWING STREAMING BUSINESS BUT ASSIGN THE
NAME QWIKSTER TO THE TRADITIONAL AND DECLINING DVD RENTAL-
BY-MAIL BUSINESS.
ON OCTOBER 10, 2011, 90 DAYS AFTER ANNOUNCING THE PRICE IN-
CREASE, NETFLIX ANNOUNCED ON ITS WEBSITE THAT IT WAS TAKING
BACK ITS DECISION TO SPLIT THE DVD RENTAL AND STREAMING BUSINESS.
ITS ANNOUNCEMENT ACKNOWLEDGED CUSTOMERS FRUSTRATION AND
PROMISED JUST ONE SITE AND ONE PASSWORD AND NO QWIKSTER.
150
200
250
300
BY THE TIME THE COMPANY RESPONDED THOUGH, SHARES IN
NETFLIX HAD FALLEN 60% SINCE JULY, AS INVESTORS AND
ANALYSTS REASSESSED THE COMPANYS LONG-TERM PROS-
PECTS. ON THE DAY OF THE ANNOUNCEMENT, NETFLIX TRAD-
ED UP MODESTLY IN MIDDAY TRADING, BUT IT STILL FINISHED
THE DAY DOWN 4.8%, AT $111.62.
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1
THE END
THIS IS THE WORST
POSSIBLE IDEA, DIS-
GUISED AS A SINCERE
APOLOGY, WHICH
MAKES IT EXPONEN-
TIALLY WORSE, IF THAT
IS POSSIBLE. NOW ILL
HAVE TO SEARCH ON
TWO SITES FOR THE
SAME MOVIE?
A CUSTOMER :
NETFLIX DOES NOT
EVEN OWN THE
QWIKSTER HANDLE ON
TWITTER. IT BELONGS
TO JASON CASTILLO,
WHO TWEETS ABOUT
HIS DRUG ADDICTION.
A BUSINESS MAN :
THANKS FOR WISING UP.
SUBSCRIBERS WERE PLEASED WITH THIS QUICK REVERSION.
NETFLIX CO - FOUNDER
AND CEO REED HASTINGS :
WE UNDERESTIMATED
THE APPEAL OF THE
SINGLE WEBSITE AND
A SINGLE SERVICE. WE
GREATLY UNDERESTI-
MATED IT!
ORIGINALLY
HAD TO BE THE
STUPIDEST BUSI-
NESS DECISION IVE
HEARD IN 20 YEARS.
LETS QUIT SMOK-
ING WHATEVER YOU
GUYS ARE SMOKING
UP THERE OK?
4
THE END
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