If you’re a Netflix subscriber, or a member of the internet at large, you’ve probably heard the news already: Netflix is spinning off its DVD rental service into a separate company named Qwikster. You can read the letter from CEO Reed Hastings that was mailed to subscribers on the Netflix Blog
Unlike their recent price changes, this new move not only caught me by surprise, but doesn’t initially make sense.
As a consumer (and subscriber) this doubles my effort for what used to be a seamless, integrated service.
As a consumer (and subscriber) this doubles my effort for what used to be a seamless, integrated service. I now get billed separately, have to deal with two customer service departments, and two sets of policies that may, in time, conflict. Not only that, but when actually searching for movie I now have to search two websites, separately. I’ve always maintained two queues on Netflix, but it was very convenient to search for a movie, notice it was available for streaming and add it to that queue instead of the DVD queue.
I pride myself on having a bit of business savvy and it’s not often that a company I greatly respect leaves me scratching my head, so I’m trying to guess why Netflix would be willing to make such a bold move. I’ve got two theories:
#1 Sell while you’ve got something to sell
I think it’s no secret that Netflix doesn’t see a future in DVD rentals. They haven’t exactly made a secret of it. Just look at which part of their offerings is retaining the company name and brand. Hint: it’s not the DVD service. Hastings, in his letter today went so far as to say it this way:
“Most companies that are great at something – like AOL dialup or Borders bookstores – do not become great at new things people want (streaming for us) because they are afraid to hurt their initial business.”
The rational is that they need to split off DVD service so that they can focus on streaming service. I think there’s validity to this, but I wonder why the split needed to be so public? The services were already essentially split internally, so why split them formally? Why put your customers in some temporary pain? Other companies have made major transitions (Apple, for example) without formally splitting their business offerings into separate companies.
I wonder if the split is actually their exit strategy.
I wonder if the split is actually their exit strategy. Yes, companies that can’t shift focus don’t move into the future well, but Netflix has already demonstrated that it is focused on streaming and the future. Nobody questioned that, even before the price/plan restructuring, let alone this split. But what usually happens to companies that go through a large transition is that their old offerings become a drag on the company. They often can’t exit the business fast enough and go through a period where they lose money before shutting it down for good. What if Netflix, with this move into Qwikster is not only trying to avoid that scenario, but they’re trying to build a separate, currently-profitable company to make it attractive to potential acquirers? It would actually be a brilliant move, if they could pull it off. They sell off their DVD service, while it’s still successful, at for a financial windfall and use the revenue to fund continued development of their streaming offerings. Qwikster becomes a success story for them and, when the day comes in the next few years that the DVD service isn’t tenable, they don’t have it to anchor them down or distract them.
#2 Divide and conquer (Hollywood)
My other theory has to do with rights—the agreements Netflix makes with studios and production companies in order to rent DVDs and stream media. This is a grey are for me, I don’t know exactly how this works, so I’m making some top-level assumptions.
They make more money off of DVD rental agreements and they’re afraid of the scenario the music industry faces with streaming…
On the whole, Hollywood has been reluctant to embrace streaming rentals. They make more money off of DVD rental agreements and they’re afraid of the scenario the music industry faces with streaming: getting paid a paltry few cents for the streaming of an entire album. They’re happy with the status quo (always were and probably always will be) and have little incentive to change. I wonder if that hurts Netflix in negotiations?
It’s possible that now, in rights negotiations, Netflix can wipe the slate clean. Anytime a movie industry executive brings up DVD agreements as a reference point for streaming licensing Netflix can say: “that’s not relevant,” and actually, literally mean it.
It’s all business
I think my second theory, while it doesn’t hurt, still doesn’t seem to require such a drastic change. I also can’t see an angle where this is better for the consumer in the short-run (the short-run being as long as someone needs to rent a physical DVD because something isn’t available for streaming). So my money (literally, I have a very, very, small investment in Netflix stock) is in theory one.
Today, as a subscriber of Netflix, I’m unhappy. As a stockholder, I think I understand it and I’m guardedly-hopeful that it’ll work out the way they intend.
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