Netflix flub: Not as bad as you think

September 30, 2011: 9:53 AM ET

Netflix is covering all its crisis PR bases while doubling down on the moves that made subscribers angry in the first place. Can the company really have its cake and eat it too?

By Anne VanderMey, reporter

reed_hastingsFORTUNE -- Up until a few months ago, Reed Hastings could seemingly do no wrong. In 2010, he was Fortune's businessperson of the year. The magazine painted a picture of a bold and prescient leader, albeit one with an "obsession with failure." He never believed in the long-term viability of the DVD business, Fortune wrote. But no one expected him to cut it off so quickly.

When Hastings announced that the cost Netflix (NFLX) subscriptions would go up by 60%, customers were not amused. The company hemorrhaged subscribers and the stock plunged. Then, as if adding insult to injury, Hastings sent customers an email that opened with "Dear [name here], I messed up." But instead of, say, lowering prices, he announced that he was renaming the newly split off rental division Qwikster. Qwikster?

Making matters even worse, it turned out the name was goofy enough to already have been takenĀ on Twitter (unbeknownst to Netflix, apparently) by a man named Jason Castillo with a marijuana habit and a tendency to tweet things like, "I just got scared I went into the shower turned on the water n then stuff started falling I was lik omg wtf lol."

Users were outraged. In the nearly 30,000 comments the letter received on the company blog, customers denounced Netflix, said they would unsubscribe and compared Hastings unfavorably to the Enron executives -- among other colorful insults. The episode was a PR disaster.

But some of the communications industry's leading experts say Netflix's efforts aren't completely off the rails. Hastings is still doing a few things right (short of actually giving customers what they want) that may help the company survive the pitchfork-wielding mob of subscribers and investors currently at its gates.

First, between the letter, an accompanying video and an ABC "Nightline" special, Hastings has become a visible champion of the company's new direction. "I give him credit for being the spokesperson for the change and owning it," says Ben Boyd, global chair of corporate practice at Edelman, a public relations firm. "It's kind of hard to step back, once you're out there."

Not that he's the perfect spokesman. Hastings was perhaps too absent in the months following the company's subscription price hike, and he seemed to have been genuinely surprised at the customer outcry. Netflix got "caught with its pants down," says Boyd, by not realizing that a passionately loyal customer base cuts both ways. Just look at the backlash every time Facebook updates its interface. "When you've got a brand that's got rabid fans, and you've built that emotional connection, there's a flipside to that," says George McGrath of communications firm McGrath Matter Associates.

But when the press turned on him, Mark Zuckerberg got "extra-communicative," something Hastings promised to do in his letter. Zuckerberg not only explained his company's decisions, he promised $100 million to the New Jersey public school system, pledged to donate half his wealth to charity over the course of his lifetime and made an appearance on Saturday Night Live. Hastings' willingness to stand up for Qwikster may look bad now, but it's a savvy move if he follows through.

An unpopular statement is better than nothing, says Richard Levick, crisis management expert and president of Levick Strategic Communications. People "will forgive mistakes, but they will not forgive arrogance," Levick says. "Silence is just arrogance with the volume turned down."

Case in point: Dick Fuld of Lehman Brothers and the rest of the financial services industry. By battening the hatches instead of responding to criticism directly, many bankers allowed themselves to be cast as the undisputed villains of the financial crisis. It was the most vocal CEOs, like Jamie Dimon of JPMorgan (JPM) and even Lloyd Blankfein of Goldman (GS), who emerged relatively unscathed.

The next thing Netflix did right: It delivered customers the bad news about the price hike and the name change in fairly rapid succession. Says Levick: "Machiavelli always told us: bad news all at once, good news spread out over time."

And finally, Hastings said he had been wrong and asked for forgiveness. People respond to "I'm sorry." "When you make a mistake, humility and an apology is a good thing," McGrath says. Crass as it may seem, Netflix covered its PR bases, whether or not people actually bought Hastings' apology.

Like it or not, Hastings has placed his bets on the future of the home movie business. Whether he can take customers along with him (assuming Netflix survives its current predicament) might have more to do with things like the company's recent streaming deal with DreamWorks (DWA). "Who has the best library, that's the real race right now," Levick says.

As for the PR gaffes surrounding Qwikster, observers have wondered whether they were so grievous that no one will use the DVD rental service with the cutesy name, or whether the service will be quickly overshadowed by services like Redbox (CSTR), and if its Twitter handle will continue to be used by a drug-addled teenager who likes tacos. But those questions are almost irrelevant, because Qwikster was designed to fade out. As technology marches on, the iconic red envelope will eventually assume a place in history -- potentially right next to the 8-track. In the larger Netflix story, Qwikster -- and whether or not you like it -- doesn't matter much at all.

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