An Explanation and Some Reflections (Qwikster)

The situation

In 2011 Netflix had two businesses under one subscription. Its DVD-by-mail service was profitable but expensive to run and destined to decline. Its streaming service was growing fast but depended on licences from studios, which were becoming much more expensive. Reed Hastings, the co-founder and chief executive, believed streaming was the company’s future and that the two businesses needed to be managed separately.

In July 2011 Netflix announced that DVD and streaming would become separate plans. For customers who wanted both, the price would rise from $9.99 to $15.98 a month, an increase of up to 60 percent. The announcement provoked an angry reaction from customers, and over the following two months Netflix’s share price lost about half its value.

What the post argues

On the night of 18 September 2011, Hastings published a blog post, emailed to subscribers with a video, that began with an apology. As reported at the time, it opened: “I messed up. I owe you an explanation.” He wrote that he had “slid into arrogance based upon past success,” and acknowledged that customers felt Netflix had not respected them in the way the price change was handled.

The post then explained the reasoning behind separating the plans: streaming and DVD by mail were becoming two different businesses with different costs and different futures. And it announced the next step. The DVD service would be renamed Qwikster and moved to a separate website, with separate accounts, billing and recommendations. Qwikster would also add video game rentals. Netflix would become a streaming-only brand.

The decision it carried

The decision was to separate the two businesses fully, in the customer experience as well as in pricing and internal management. Customers who used both would have two websites, two accounts and two bills, and their ratings and queues would not move between them.

What happened

The reaction was worse than to the price change. Customers and commentators saw the post as an apology for communication followed by a further, unrequested change that made their lives harder. Three weeks later, on 10 October 2011, Netflix reversed course. Its blog said: “It is clear that for many of our members two websites would make things more difficult, so we are going to keep Netflix as one place to go for streaming and DVDs.” The new prices stayed.

Netflix later reported that it had lost about a million more subscribers than expected in the quarter, including 800,000 disc renters. Its share price fell further before recovering in the following years.

In the long run, Hastings’s strategic judgement proved correct. Netflix invested heavily in streaming and original programming, starting with House of Cards in 2013, and became the world’s largest streaming service. The DVD business shrank steadily and Netflix shipped its last discs in September 2023.

How to read it as a product manager

The Qwikster episode is one of the most cited lessons in product management because it separates strategy from execution so cleanly.

The strategy was right. Streaming was the future, DVDs were the past, and the two businesses did need different management.

The execution put the company’s structure ahead of the customer’s experience. Separate websites and accounts made sense on an organisation chart. For a customer who used both services, it meant twice the effort for no benefit. A good test for any reorganisation that reaches customers is whether they would choose it if asked.

The sequencing compounded the damage. Customers who had just absorbed a price increase were asked to absorb a brand split weeks later. Two disruptions in quick succession felt like disregard.

The apology undermined itself. Apologising for poor communication while announcing another disruptive change suggested the company had not understood what customers were upset about.

The reversal deserves credit. Netflix recognised the mistake and undid it within three weeks, before Qwikster launched fully. Many companies defend bad decisions far longer.

The decision, examined closely

What triggered it

Rising streaming licence costs and the inevitable decline of DVDs pushed Netflix to separate its pricing. Hastings also feared that a company tied to a declining business would fail to commit fully to the new one, as he believed had happened to companies in other industries.

The constraints

Netflix needed to pay much more for streaming content, which meant raising revenue. It could not abandon DVDs, which many customers still relied on and which were profitable. And it had to make the change while competitors and studios were watching for signs of weakness.

What the author was optimising for

The Qwikster decision optimised for organisational focus: a streaming company unencumbered by a DVD business. It treated customer inconvenience as a temporary cost of that focus.

Second-order effects

The episode damaged trust in Netflix for a time and made it cautious about price changes and communication for years afterwards. It also became a case study in business schools and product teams. Internally, it reinforced Netflix’s commitment to streaming; the company proceeded with its strategy while abandoning the most disruptive part of its execution.

The counterfactual

If Netflix had separated pricing gradually and kept one website, it might have avoided most of the backlash while achieving most of the strategy. If it had kept the bundle, it might have struggled to pay for streaming content. The strategy did not require Qwikster; the brand split was an avoidable addition.

What is contested

Some analysts argued at the time that the price change, not Qwikster, did most of the damage, and that Netflix’s long-term success shows the episode was a short-lived stumble. Others see it as a near-death experience for the company. Hastings himself later described it as a major mistake and an important lesson.

Sources and limitations

The original post is quoted as reported in contemporary coverage; reports differ slightly in the wording of the opening line, which is given here as quoted by Home Media Magazine. Subscriber figures and price changes come from news reports of Netflix’s announcements. The share-price decline is described approximately because sources give different figures for different periods.