First, a disclaimer -- I was involved in the startup of Bitly, a few years back.
And a brief history. It was wildly popular right out of the gate. A much-needed product that did something simple reasonably well. The URLs could have been shorter, which was the point of the service. But it was fast, had a nice interface, stayed up even when Twitter didn't, and added some nice but optional features that could be ignored if you weren't interested.
Then, as was sure to happen, the platform vendor entered their space. So now they have to pivot. It's not optional. They have to do something new, related to what they did in the past, but new.
Based on what I see in their new product release it looks like they're taking a step toward competing with Twitter. But they didn't do it in an easy to use way. And the new product is not well user-tested. It looks like they barely used it themselves before turning it on for all the users. Oy. Not a good way to pivot.
3. Take a few weeks to incorporate the huge amount of feedback they've gotten and streamline the new UI.
4. Instead of launching it at bitly.com, launch it at newbetaworksserver.com. Borthwick is really good at coming up with names. Come up with a new one. Not in any way related to the name Bitly. Now people can try it out, knowing that it has Bitly goodness at the core, but in no way does it interfere with people's enjoyment of the original simple, fast and proven product.
5. Once all the glitches are out, and there will be glitches, put a little box on every page on the Bitly site that in a nice simple way promotes the new service. "Here's something cool that we thought you might be interested in."
6. Never merge the two. Just create a new product. That's the biggest piece of feedback you're hearing. People liked Bitly. Why screw around with that! It's hard to create such a widely-used long-lived product that people like.