I awoke this morning to an email from Netflix CEO Reed Hastings saying he was sorry… although it wasn’t entirely clear if he was sorry for losing half of his market cap in the last year (shareholder) or sorry for the crappy streaming catalog and losing Starz while implementing a price increase (customer).

It became clear he was sorry for the latter and it turned out to be a fascinating read from the standpoint of hitting on the 3 major must-dos for Internet crisis management:

1) Start out with an un-equivocating apology:

“I messed up. I owe everyone an explanation.”

2) Focus on the emotional dimension of the customer dissatisfaction:

“It is clear from the feedback over the past two months that many members felt we lacked respect and humility in the way we announced the separation of DVD and streaming, and the price changes.”

3) While reflecting on the past look to the future with actions that you are taking:

“It’s hard to write this after over 10 years of mailing DVDs with pride, but we think it is necessary: In a few weeks, we will rename our DVD by mail service to “Qwikster”. We chose the name Qwikster because it refers to quick delivery. We will keep the name “Netflix” for streaming.”

BONUS: Re-iterate the apology as a “sincere” or “heartfelt” apology and that the perceived injustice certainly wasn’t “our intention”… as if it pissing off your customers is ever intentional.

As an apology this is pretty good but I’m left more confused than I was yesterday about what Netflix is trying to do. I always thought they were in the business of delivering entertainment but according to Hastings they are in one business of delivering DVDs and another that streams.

Businesses split and divest units all the time, typically when the economics of a business shift or one part of the business becomes constraining on another… or when you are HP. In this case, according to Hastings, the move is a result of:

“So we realized that streaming and DVD by mail are becoming two quite different businesses, with very different cost structures, different benefits that need to be marketed differently, and we need to let each grow and operate independently.”

So reading between the lines, Hastings knows he makes more money on streaming and needs to shift more of the business to streaming at the expense of DVD by mail. That much is clear, otherwise he would have split off streaming and called it Streamster or one of Shawn Fanning’s other orphaned children. To draw a conclusion on imperfect information, the only thing that is constraining streaming, according to Hastings, is marketing and pricing.

The first thing I recalled when reading this note, available on long form in the Netflix blog, was Ford’s ill-fated rebranding of what was then the #2 selling mid-sized sedan in the U.S., the Taurus, to the Ford Five Hundred name. Several years later Ford capitulated and in their own words acknowledged destroying a billion dollars of brand equity in the rebadging, and rebranded the Five Hundred back to the Taurus.

Netflix has in one act reaffirmed the pricing strategy that has cost them up to a million subscribers and split the brand into two entities, the unknown of the two being core business. Color me skeptical.

[Cross-posted at Venture Chronicles]