In a surprising announcement early this morning, April 1st, Netflix CEO Reed Hastings admitted his company had indeed been "throttling" his best customers and said the practice would be phased out by midsummer and replaced by a new "bottling" initiative, along with revised price plans.
Hastings apologized and said it was never the company's intention to develop a "throttling" program at all and that the widely disparaged program came about from a linguistic blunder made when some former employees leaked an internal document.
"What else could we do?" Hastings asked.
"We had to either begin throttling as quickly as possible, or divulge our joint marketing and promotional effort with Coke before we were ready. That would have placed us at a competitive disadvantage in the booming online carbonated beverage delivery arena, so we chose to throttle."
The innovative new program from two of the world's most respected brands was publicly announced today in a joint press conference attended by Hastings and Coke's CEO E. Neville Isdell.
Beginning June 1st, all DVDs shipped from the Netflix distribution center near Atlanta (Coke's home base) will no longer be sent in their signature red envelope. Instead, the online DVD rental pioneer has designed a new patent-pending plastic-lined package featuring both company's logos and containing one liter of Coca-Cola product, along with a liquid-resistant pouch containing a DVD.
Netflix customers will be required to maintain a separate soda queue, in addition to their movie queue, to state their preferences. Initially, only Coke, Diet Coke, Sprite and Sprite Zero will be available, but plans call for Minute Maid juices, TaB, Caffeine-Free Coke (and Diet Coke) and Mr. Pibb to be added by year's end.
Following a successful soft launch in Atlanta, Netflix will bring the new program to other regions of the country, starting in mid-July.
Why bother getting into the beverage delivery business at all?
"For a very long time, we've watched as our friends at Blockbuster expanded the product offerings in their brick and mortar stores with high margin items like Junior Mints, Jujubes and Jujyfruits," Hastings explained. "In an experimental program last year, we tried to do the same, but found that candy doesn't ship well during the summer months."
"It was a complete mess," Hastings added.
"One frequent renter in Warren, Michigan couldn't play 'Willy Wonka' because there was too much melted chocolate surrounding the disc. We got a lot of negative buzz online from that one... even the AP picked it up. Plus we had to send the guy a new DVD player."
The DVD rental pioneer was determined, however, to liberate couch potatoes from the drudgery of leaving the home to select and purchase carbonated beverages, much as he led the way for online DVD rentals five short years ago. It's part of his growth strategy, all focused on enhancing the customer experience.
Mindful of its need to be a responsible corporate citizen, the beverage behemoth has long sought a way to be more environmentally friendly. "By eliminating the bulky plastic bottles in which our customers normally buy our products," says Isdell "we'll be able to play a bigger part in making the world a lovelier place for the beverage consumers of tomorrow. "
He added, "We look forward to our partnership with Netflix, and to providing convenient home delivery of consumers' favorite beverage brands. The strong geographically diverse distribution network created by Netflix will support and supplement our own network of local bottlers."
Netflix maintains 37 distribution centers throughout the Unites States and promises they will provide movies and liquid refreshment to most subscribers with generally one-day delivery.
"We're able to do this much more economically than you might think," Hastings said. "Because the beverage container ships back empty, the additional cost of postage is hardly even worth talking about and will be more than offset by the new customers attracted by our partnership with Coke."
Hastings did disclose, however, that price plans would be revised to reflect the additional cost of the outgoing shipments, as each shipping center comes on board with the new program. The "3 DVD, 3 Liter" plan, expected to be the firm's most popular, will be priced at $45.99 monthly.
(Customers now pay just $17.99 to have three DVDs out at a time, with no beverage service.)
"As long as postal rates remain stable, we project we can hold the line on our new price plans until January of 2007, at which time we will begin offering microwaveable popcorn and pizza," Hastings added.
Investors were apparently less confident than Hastings in the company's ability to meet revenue projections with the new service. In after-hours trading, Netflix stock nosedived by almost a third to $20.12, down from Friday's close of $28.99.
[Previously: Et Tu, Blockbuster?; Throttle This, Netflix!]
[Previously: Depends on the Meaning of the Word "Unlimited"]
[Previously: Netflix Clarifies Throttling Position]
[Previously: Back of the Line, FTC Finds Fault With Netflix Settlement]
[Previously: Netflix Settlement Delayed, Netflix Settlement Unsettled?]
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