Netflix had a business model that worked. With more than 25 million subscribers in just the Western Hemisphere, the movie rental titan seemed unstoppable.
The company has experienced growth for four consecutive years and was poised to continue the trend.
With the decline of companies such as Hollywood Video and Blockbuster, Netflix was at the top of the movie rental business. Its streaming and DVD rental services were extremely successful.
When Netflix announced it would be splitting its two services into two separate costs and raising their prices many consumers were rightfully angry.
“Up until July this was a company that could do nothing wrong,” Justin Patterson, a Morgan Keegan equity research analyst, said in a recent interview with the Los Angeles Times.
“In the past two months it miscalculated the response to its new pricing plans and now it risks miscalculating again by degrading the usability of its service.”
The company originally charged just over $9.99 for both services. Now they charge $7.99 for online streaming and prices for the DVD service starting at $8.99.
Netflix saw its success and its number of subscribers and figured more money could be made by separation of the two services.
What the company did not expect was the retaliation it would face from consumers. Since the company announced the price hike it has lost 19 percent in shares and the company reports that it has lost 400,000 subscribers.
The anti-Netflix uproar was so great that the company had to issue an apology to its customers, along with an email that offered an explanation for the recent changes.
“(W)e 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,” said Reed Hastings, co-founder and CEO of Netflix.
Netflix announced that it would be splitting the company in two. Under the Netflix name the company will continue to offer its movie and television show streaming service.
The new company Qwikster will offer DVD, Blu-Ray and video game delivery via mail.
This is merely a Band-Aid solution for a company who has made a huge mistake by upending a business model that was working perfectly fine.
Justification for their actions may come in the form of Netflix planning to expand their streaming services to include more TV and movies than before.
However, it is up to the consumers to decide if that change is worth giving Netflix/Qwikster their hard-earned money.
Should these plans come to fruition, it may win back some of the customer loyalty that they have lost with their previous decisions.
It is unlikely that either of the companies will fail because the cost of a movie theater ticket is still well over $10 and on-demand services are not as accessible.
There is little worry that Netflix will struggle more than if they would have stayed one company with one flat rate.