Reed Hastings on Crisis Response

The transition years between 2007 and 2008 supplied Netflix's foundational infrastructure stories. In February 2007 the company delivered its billionth DVD, a copy of Babel to a customer in Texas. In April 2007 it recruited ReplayTV founder Anthony Wood to build a Netflix Player that would bring streaming to televisions; Hastings eventually shut the project down to encourage other hardware manufacturers to build in Netflix support, and the effort was spun off as the digital media player company Roku. In January 2008 all rental-disc subscribers became entitled to unlimited streaming at no additional cost, a response to the introduction of Hulu and Apple's new video-rental services. In August 2008 the Netflix database was corrupted and the company could not ship DVDs for three days, leading it to move all its data to the Amazon Web Services cloud, a migration that became a textbook case study in cloud architecture and incidentally tied Netflix's fate to the infrastructure of its eventual competitor's parent.

In July 2011 Netflix announced it would separate its subscription plans in two: one covering streaming and the other DVD rental, each starting at $7.99 a month, effectively raising the price of the combined bundle by sixty percent. In September, the same month Netflix expanded into Latin America, it announced its intention to rebrand and restructure the DVD service as an independent subsidiary called Qwikster, splitting the two businesses entirely. Customers reacted with fury, reading the moves as a price increase and a betrayal of loyalty. Netflix's stock value dropped, and eight hundred thousand of its twelve million customers cancelled their subscriptions. Netflix quickly apologized, and in October 2011 announced it would retain the DVD service under the Netflix name, with streaming and DVD plans branded together. The reversal was as instructive as the blunder: Hastings had misread how much of the brand's identity lived in the little red envelope, and the episode became the canonical case study in how not to migrate a loyal customer base from an old business model to a new one.

In April 2022 Netflix stated that one hundred million households globally were sharing passwords, with thirty million of them in Canada and the United States, and its stock price fell thirty-five percent following the announcements. By June 2022 it had laid off four hundred fifty full-time and contract employees as it trimmed costs amid lower-than-expected subscriber growth. The correction produced a strategic overhaul. In July 2022 the company announced an advertising-supported subscription option, launched November 3, 2022 in twelve countries at $6.99 a month in the United States under the name Basic with Ads. In February 2023 it cut subscription prices in more than thirty countries, and it expanded paid-sharing rules from Canada, New Zealand, Portugal, and Spain to the United States and Brazil in May 2023. The measures worked: Netflix added 5.9 million subscribers in the second quarter of 2023 to reach 238.39 million, and after a record 18.9 million additions in the fourth quarter of 2024 it announced it had exceeded three hundred million subscribers worldwide.

The decision to split Netflix in two was born in casual confidence. A month before the announcement, Reed Hastings was soaking in a hot tub with a friend when he shared the secret: his company was about to announce a plan to divide its movie rental service in two, one offering streaming over the internet and the other old-fashioned DVDs by mail. The friend, who was also a Netflix subscriber, told him under a starry Bay Area sky that it was awful, that she did not want to deal with two accounts. Hastings ignored the warning, operating on the general principle that chief executives should discount what their friends say. He has since regretted it. The anecdote, which Hastings himself recounted, became the emblem of the episode: a founder so convinced by his own long-term logic that he discarded the most direct customer signal available, delivered in confidence by someone with no agenda beyond her own subscription invoice.

The damage was quantified on October 24, 2011. Netflix told investors it closed the third quarter having shed eight hundred thousand American subscribers from the prior quarter, the first such decline in years, and the stock plummeted more than twenty-five percent in after-hours trading. The financial results underneath the subscriber loss were surprisingly strong: net income of 62.5 million dollars, or $1.16 a share, up from 38 million dollars a year earlier, on revenue that rose forty-nine percent to 822 million dollars, with both revenue and income topping analysts' expectations. The disconnect defined the moment. Netflix was more profitable than ever while shedding the goodwill that had made it one of the most respected internet brands in America. Subscribers had revolted over the summer's price increase and the proposed breakup, and many simply dropped the service, tarnishing a company that had spent a decade building its reputation on doing right by customers who hated late fees.

Hastings's response was a public accounting of his own errors. In his most detailed discussion of the period, he said he had been guilty of overconfidence and of moving too quickly, while insisting that Netflix's future still lay in streaming rather than DVDs. He twice linked the hostility toward the price change and breakup to the angry national mood, citing the Tea Party and Occupy Wall Street by name, and said subscribers had been bothered more by the summer price shock than by the split itself: until September, a combination of streaming and DVDs cost as little as ten dollars a month, and the same package now cost sixteen. In its letter to shareholders, Netflix declared it was done with pricing changes. Hastings said he was not sure whether the split plan had been presented to customer focus groups before it was made public, assumed it had been, and could not recall what any such groups had said. Netflix, he said, was now slowing its decision-making to leave more room for debate about major changes.

The Qwikster affair was the fall of a company that had seemed to solve the innovator's dilemma. Netflix's stock had risen ninefold from the start of 2009 to peak above three hundred dollars in July 2011, and Fortune had put Hastings on its cover as businessperson of the year for navigating the company from DVDs to the digital future while keeping the two businesses blended. The breakup decision, Hastings said, was based in part on data showing a faster-than-anticipated shift to streaming: in the first quarter of 2011 DVD shipments fell year over year for the first time, leading Netflix to declare the DVD business had peaked, and very few new subscribers were choosing discs by mail. But the data-driven company had underestimated the unquantifiable emotions of subscribers who still wanted their little red envelopes even if they forgot to watch the DVDs inside. How Netflix came to be so out of touch with its customers became, in the paper's framing, a cautionary tale for every company attempting the transformation from old media to new.