Netflix must feel like captain Billy Tyne in the The Perfect Storm: Just went it's hit by one massive wave, another one soon drowns the company from any possible respite. Earlier this week, CEO Reed Hastings announced the company would split its streaming and DVD businesses into separate brands, the latter becoming Qwikster.com. Many reacted terribly to the news, especially just after the company recently announced a 60% increase in prices.
Normally a company would keep its head down in a similar situation, taking solace in the dog house. But fortunately for those interested, Netflix CFO David Wells had a previous (for us, serendipitous) engagement at Goldman Sachs's Communacopia conference in New York today. There, investors and analysts were able to ask Wells a series of probing questions. Here's how he responded.
On The Netflix-Qwikster Divorce
"The central thesis for the rebranding was that, behaviorally, over the last 12 to 18 months, people were signing up more for the streaming service. Even hybrid users were using more—and therefore deriving more value out of—streaming. There's just been too many examples in history of companies that don't move fast enough to position their brand for what we feel is the long-term market opportunity ... the larger opportunity of digitally delivered entertainment. You can think of the price changes and rebranding as one central strategic decision, even though they were separated in terms of announcement. In hindsight, we can debate whether that was a wise move ... In terms of timing, we had a long history of being very transparent with our consumers. We felt we needed to be honest with the consumer—we'll take our licks as we get them."
On Qwikster, The New DVD Division, And What It Can Accomplish By Splitting With Netflix
"Certainly the DVD division will be able to market itself. Over the last 12 to 18 months, you haven't seen a DVD featured in a Netflix ad because we're focused on streaming. Internally in the company, it was increasingly difficult for those people who had built this great DVD service over the last five years to get resources, to be noticed and talked about and excited—attracting and retaining talent became harder."
On Qwikster's Video Games
"It's a small thing. It's not expected to generate a ton of profit for us. But it's more a signal that we're continuing to invest, and not abandoning [DVDs] for the consumer."
On Netflix As A Streaming-Only Site: Will It Add More Streaming Services Such As Video On Demand?
"Traditionally what we've said about VOD [video on demand] is that it's a low margin business. We weren't that interested in it because it would complicate the simplicity of the offering. We're looking at a number of different options, in terms of making it convenient for folks to find that content [on Netflix] rather than going to a competitor or another site. I wouldn't expect that to be our reaction right now, but certainly in the evolving market, we'd look at it and other things as well.
On Reaction In The Press And Subscriber Loss
"Most of the behavioral change from a price increase happened right after the announcement ... What we saw was indeed a spike, and it certainly went down, but in prior periods it went down to zero relatively quickly after that announcement period. What we saw [this time] ... was a spike and then a steady response throughout the quarter ... Did we see [churn] in cancels or customer acquisition? Most of it was on the cancel side, but there was an acknowledgment that we did see impact on acquisition ... From an acquisition standpoint, there was a group of people who had no impact—they didn't have a price increase, they didn't have a rebranding or separation. So what we did see was that word of mouth did take an impact. I would imagine that the news cycle didn't help us."
On Lowering Prices
"I think at this point, we're going to step back to look at a number of things. Lowering the price or offering a three- or six-month discount is kicking the can down the road. It's certainly in the realm of possibilities, but i don't think it's going to win back the customers we lost."
On Making Customers Feel Better
"In the immediate, actions speak louder than words. I kept getting asked if we'd spend more on marketing. Marketing falls in the words category, not in actions. I think we're going to continue to add content to make streaming content that much better—[and] to optimize the DVD interface for the folks who are primarily using a computer and keyboard to make their selections, versus folks on the streaming side that are ever increasingly using a device with a left-up-right-down remote to make their selection and interacting with the site."
On Adding More Content, Starz
"We felt they [Starz] were asking too much for the value of the content…I'm sure [chief content officer] Ted Sarandos—pretty sure his phone started ringing when that announcement went out [from other content providers]."
"It would be really highly speculative for me to comment."