Greetings.  Netflix is in the news today on the heels of a major price increase, a dramatic decision to break the company into two businesses, a rapid decline in its stock price and an amusingly self-serving, cover your butt 'apology' and marketing letter to its customers (see below).  Or at least that's my take on the letter…though you might have a slightly more favorable impression of this communication from Reed Hastings–the company's brilliant Co-Founder and CEO.

But from my vantage point it seems as though this remarkable company just might have peaked and is now trying to maintain its brand and stock price on the backs of its devoted subscribers.  The one thing that is clear is the rapid decline of its original DVD delivery business–a business model that crushed Blockbuster and other brick and mortar movie rental companies as it revolutionized the industry. In the process, Netflix earned a cult-like following of folks who sang its praises as they expanded their own movie viewing horizons in a world with nearly unlimited choices.  All at a very reasonable price.  And when the company added the option of streaming films, it gave its customers two great delivery options with one simple point of access.

Now, however, Netflix customers will have to deal with two distinct companies (and one distinctly higher price).  "Qwikster"–the renamed and quickly dying mail delivery business, and "Netflix"–the future-focused streaming business will each have their own portals, their own offerings and separate prices (and bills) whether or not this is better for customers.  And while Netflix says that it really cares about customers and is still serious about the delivery business–saying only that "Qwikster" refers to "fast delivery"–the new name seems to refer to how quickly they intend to disinvest in this line of business, how quickly they came up with such a trite and laughable name for it and how quickly they have turned their backs on the customers who built their company's success.

Times change very quickly and great businesses must make smart choices to remain relevant.  And this might be another brilliant decision by the leaders at Netflix.  But the most enduring companies base their decisions on the needs and aspirations of their customers.  And in a market with new choices millions of Netflix customers are now voting with their feet and wallets.

Dear Alan,

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.

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.

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.

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.

We win in business and in life when we continue paying attention to the marketplace.  And when we never believe that our genius gives us the right to ignore those we have the privilege to serve.

Cheers!