Latest / The CEO Diary with Fexingo: Leadership Lessons, Executive Decisions, and Corner Office Stories / How Netflix Axed Its Own Cash Cow and Survived
Transcript
- Lucas: In the fall of 2011, Netflix had about 24 million subscribers in the US, a market cap north of $15 billion, and a CEO named Reed Hastings who was convinced that the future was streaming. He was right about the future. But the way he announced that future almost destroyed the company. Luna: This is the Qwikster moment, right? The split into two separate companies — Netflix for streaming, Qwikster for DVDs? Lucas: Exactly. In July 2011, Hastings announced that dvd by mail subscribers would now pay a separate fee — effectively a 60 percent price increase for anyone who wanted both services. Then in September, he went further: Netflix would split into two companies. The DVD business would be called Qwikster. You'd have two websites, two queues, two billing systems. Luna: And the reaction was immediate and brutal. I remember reading that they lost 800,000 subscribers in the next quarter, and the stock went from around $300 to under $60 in a few months. Lucas: It was an 80 percent drawdown in about four months. Wall Street hated it. Customers hated it. The media had a field day. Hastings was on the cover of every business magazine with headlines like 'Netflix's Self-Inflicted Wound.' Luna: What's interesting is that the logic was actually sound. The DVD business had different margins, different supply chain, different customer behavior. Splitting them could let each focus. Lucas: Right, but the execution was terrible. Hastings admitted later that he underestimated how much customers valued the simplicity of a single brand and a single bill. The Qwikster name was mocked — it sounded like a fast-food chain or a spelling error. And the timing was brutal: streaming was still clunky, content was thin. Luna: Let's go back to the tape. Hastings wrote a blog post on September 18, 2011 — it was titled 'An Explanation and Some Reflections.' He basically said: we're sorry, we got it wrong, Qwikster is dead. Lucas: The apology was remarkable for a CEO. He didn't blame the market or customers. He said, 'I'm the founder and CEO, and I'm the one who pushed for this. I own it.' And within weeks, they reversed the split entirely. No Qwikster. No separate billing. They just took the pain and moved on. Luna: But here's where it gets really interesting. While everyone was focused on the chaos, Hastings and his team were already reinvesting in the one thing that would justify the whole streaming bet: original content. Lucas: Exactly. In early 2011, before the Qwikster fiasco, Netflix had already outbid traditional TV networks for the rights to 'House of Cards.' They committed $100 million for two seasons — blind, without a pilot. That was unheard of for a dvd by mail company. Luna: So the Qwikster disaster actually forced them to accelerate the streaming pivot. The DVD business was dying, and the price increase pushed customers to streaming faster. Within a few years, DVD subscribers went from 24 million to under 5 million. Lucas: If these conversations have moved your work forward in some small way, it's worth knowing that this show stays ad-free because of listeners who support it. If you've gotten value from episodes like this, you can help keep it going at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a simple way to support the kind of deep-dive business storytelling we try to do here. No pressure, just if it's made a difference. Lucas: So back to Netflix. After the apology, Hastings doubled down on streaming technology and original content. By 2013, 'House of Cards' debuted and the narrative flipped entirely. Netflix was no longer the company that had angered customers — it was the company that had reinvented television. Luna: And the stock recovered. By 2015, it was back above $300. By 2018, it was over $400. The Qwikster moment became a case study in how to fail, apologize, and then execute your way out of a hole. Lucas: There's a specific leadership lesson here. Hastings could have fired someone, or blamed the research team. Instead, he wrote a public apology that was direct and personal. The CEO letter basically said: 'I'm the one who pushed for this. I didn't listen to the pushback. I'm sorry.' Luna: And then he acted on it. Not just words — they killed Qwikster, simplified pricing, and spent billions on content. By 2016, Netflix was spending $5 billion a year on original programming. Lucas: Compare that to Blockbuster, which had a similar streaming opportunity in 2000 and chose to laugh Netflix out of the room. Hastings had the vision, but he also had the humility to admit when he went too fast. Luna: It's a reminder that being early on a trend is the same as being wrong until the market catches up. The Qwikster split was too aggressive for 2011. By 2016, it would have made sense. But by then, Netflix was already dominant. Lucas: So the takeaway for any executive: bold bets need to be timed to customer readiness, not just technological possibility. And when you misjudge that timing, own it fast, apologize without excuses, and redirect your energy toward the long-term product that will eventually make the short-term chaos look like a blip. Luna: I think that's the real story of Netflix's near-death experience. It wasn't just about streaming versus DVDs. It was about a leader who had the courage to reverse course publicly and then bet even bigger on his original thesis. Lucas: And that thesis — that internet-delivered television would replace linear TV — is now so obvious we forget how radical it sounded in 2011. But the execution required surviving your own mistakes. Hastings did, and the rest is streaming history.