Netflix CEO Reed Hastings announced last week that the company would be splitting off their DVD rental service into a new business to be called Qwikster. Last time I checked their blog post on the subject, there were 27,183 comments. Approximately 27,181 of them were negative.
Wall Street didn’t approve of the move either, and the stock is now trading at less than half the price it was two months ago.
Even my own friends are sending me puzzled notes, wondering if the “wheels are coming off the cart”.
What can I say? They are all wrong.
Not only am I completely in support of what Netflix is doing, but I think it is one of the smartest, most disciplined and bravest moves I’ve ever seen.
Just to be clear, I haven’t worked for Netflix for years. So I have no inside knowledge of what specifically led to this particular decision, I haven’t talked to anyone there about it. Everything I know about it I picked up from the same sources you did.
Nonetheless, I understand what they did and why they did it as completely and thoroughly as if I had been sitting around the conference table myself.
Plain and simple, this move was all about focus. Relentless focus. A focus that has been deeply embedded in the Netflix DNA since day one
Here’s an example of what I mean.
When Reed and I launched Netflix in 1998, it was a very different company from the one you know today. The Queue, Unlimited Rentals, and the No-Due-Dates-No-Late-Fees model were still more than a year away. Our rentals were standard a-la-carte rentals. They had due dates. We charged late fees.
Oh . . . we also sold DVDs.
In fact, much to our great concern we sold a lot of DVDs. Bucket loads. So many, that by the end of our first summer, I would guess that 95% of our revenues were coming from the sales of DVDs. Although this did pay some bills, it was obvious to us that this was not a sustainable business. It was inevitable that at some point in the near future we would have Amazon entering the DVD business. And then Walmart. And then just about every mass market retailer in the country. All of which would have crushed our margins and slowly but surely driven us out of business.
Not only that, but even while the going was good, it was hard not to let the tail wag the dog. Despite knowing that the true future of the company was rental, it was hard not to spend time focusing on the area of the business where most of the money was coming from.
Most importantly, by trying to run a business that did two things well, we inevitably were forced to make an endless series of compromises that resulted in us doing neither of them well. Our landing page and sign up flow had to accommodate two different paths. Our checkout process needed to handle two types of transactions. Our shipping process had to accommodate two different types of products (one that had to come back and one that didn’t). Our content system had to accommodate titles we could only rent, ones we could only sell, and ones where we could do both.
In hindsight, it seems like such an obvious decision to stop selling and focus on renting. But wow – for a young CEO like myself — turning away from the source of 95% of our revenue was just about the hardest thing I had ever done.
Needless to say, it worked. Not only did walking away from 95% of our revenue have a way of focusing the mind on the remainder of our business, but the benefits began showing up everywhere – even in places we never suspected.
By freeing our designers from having to create a sign-up flow that accommodated two types of business, we were able to cut out steps, clarify instructions and simplify the process. Conversion went up.
By spotlighting a narrower benefit, we were able to clarify our positioning, resulting in more effective external marketing. Our acquisition costs went down.
By focusing on a narrower set of problems, it made engineering much more productive. It made QA testing simpler. It made metrics more intuitive. And it paved the way for us to implement a process of rapid iteration and testing that ultimately uncovered the big innovations that ultimately led to the Queue, Unlimited Rentals, and No-Due-Dates-No-Late-Fees.
The success emboldened us and we gained confidence in this approach, each time finding that narrowing our focus expanded our opportunities. I could probably come up with 150 examples, with each new success giving us renewed confidence in the benefits of folding partially successful hands in order to double down on more promising ones.
At every product meeting, in addition to figuring out what to do, we made sure to devote time toward deciding what not to do. We referred to it as “scraping the barnacles”, and, like boat owners, found that if we had the discipline to regularly remove all the small things that inevitably accreted to our hull over time, it would have a noticeable effect on how fast we could move through the water.
I suppose it’s only fair to mention at this point, that not everyone liked our decisions to get rid of these “barnacles”. For example, since early on nearly 3/4s of our customers were buying DVDs from us, it probably is safe to say that they were none-to happy that we stopped selling them. Ditto for the customers who loved renting a-la-carte only to see us drop it and focus on the all-you-can-eat program. While I’m at it, I’ll throw in an apology to the tens of thousands of other early Netflix customers who were part of price programs, feature tests, and other business experiments that we ultimately decided to discontinue. I’m truly sorry about all of it. But hard as each decision was in the short-term, I never questioned whether it was the right thing to do for the long-term success of the company.
So even though I haven’t been at Netflix in a long time, I can easily imagine the growing frustration they must have felt these last few years as they made decisions they knew were suboptimal for the streaming business in order to maintain compatibility with the DVD business. How to work out pricing that covers multiple use cases. How to come up with messaging that embraces two different ways to receive movies. How to manage the significant differences in the content available between the two services. How to simplify the landing page and sign up flow.
Well no longer. Not having to worry about compatibility between the services makes it infinitely easier to optimize every decision around the real prize, which is clearly streaming. Pricing. Messaging. Content. Sign-up-flow. All better now.
Are customers upset? Undoubtedly. And I’ll be the 27,184th to say that the communications surrounding both the price increases and the Qwixter launch were ham-handed, tone-deaf, and have unquestionably damaged the brand. But should fear of either of these things have prevented Netflix from taking this step and ensuring that their streaming service has every possible advantage going forward? Absolutely not.
In his blog post, Reed apologized for not communicating well, not for having made the wrong decision. I agree with him on both counts.
But what is truly mindblowing, is that when I was CEO trying to screw up my nerve to walk away from selling DVDs, I risked alienating tens of thousands of customers. Reed is showing that he has courage and conviction to do the right thing despite having tens of millions of them.
This is why this guy is the best entrepreneur on the planet.
Kibble 
So glad to hear your thoughts on this move Marc. I’ve been on the sidelines as NFLX rose to $300 a share. Now we see this market penalty due to miscommunication/misunderstanding, but the business will be stronger in the long run. Might be time for bargain hunting at the $130 level, but I’m personally not a customer anymore and The Oracle would say you can’t invest in products you don’t use.
Wow…thanks for sharing the story from another angle. I obviously jumped to conclusions when it came to Netflix and never thought about the real reasons why they were doing what they were.
Thanks again and congratulations on being Freshly Pressed!
Well written. I trade stocks all the time and looking at the nflx chart before the crash just had crash written all over it. Was this to do with the decisions made by management? That was probably the catalyst, but the crash was inevitable. It was over traded and became its own bubble.
It simply was not worth the price on the ticker.
Now it has crashed, it can hopefully once again get a steady increase inline with its true underlying value and so have less of a rough volatile ride.
As a customer who lives out in the country and one who may never be able to get live streaming or cable (as I would assume many of your initial customers were), I don’t understand why it wasn’t separated out initially, as blu-ray is. It was an added feature in my opinion and something I would not use. I appreciate having my bill lowered to pay for only what I am able to receive and not to have to subsidize the streaming aspect.
So the customers are wrong, the stockholders are wrong, and Hastings/Randolph are the two who are right. H-U-B-R-I-S.
i’m not sure you read his words. he provided multiple examples where netflix focused its business for future growth and sustainability while forgoing temporary profits and customer goodwill.
he recognizes and apologizes for pissing off customers and explains why it might be wise to do so in the long run. he doesn’t say anything about stockholders, who by definition are out for short term gains over long term, relative to a founder/ceo.
I think that he understands. The problem is that more and more services are going to streaming based formats, from Amazon to iTunes to Blockbuster.
Instead of stepping into a new format, as they did previously, they are alienating customers and losing content to an ever increasing competition. They are splitting up their site and not adding to the service that has been established. Each move they are making seems to be made in their thought that they can do no wrong. It is this type of hubris which may lead them to fail.
The question is, which future growth will this actively sustain, Netflix, or Qwikster?
I definitely got the vibe from Marc’s words that a few years back the DVD buyers were not the “right” customers for him and Reed. Oh sure, they serviced those customers, but the whole time they were doing it they thought about those awesome, brawny, rental customers they would someday have. And now here we are, years later. After engorging themselves on rental customers, it turns out those customers are no longer a good fit for the Netflix model. Those customers that now want an integrated website that does “more than one thing” will need to kindly close the door behind them when they leave. The love is lost. Reed’s just not into them anymore.
Now Reed’s into customers that just want 1) a partial library to paw through, and 2) a limited use website that doesn’t know that much about your past DVD rentals and 3) has no way of sharing that viewing history with others (even though he’s on the Facebook board of directors). He basically just wants to sell content to my 7 year old son. He’s about the only one that would forgive the technical failings of the new Netflix (and has not yet developed the need to share anything on Facebook).
There is a certain age at which your loves no longer really suit you. I think Reed may have reached that age.
I have to agree. I didn’t understand the whole uproar. My husband and I are Netflix customers and all we use is the streaming. We are impatiently waiting for all the DVD mess to go away so that we can get the latest movies via streaming. I just don’t understand why folks got so angry. Of course, yes, he could have given us all a bit more warning…
Separating the DVDs from streaming doesn’t necessarily mean you’ll get the latest movies from streaming, right?
Most likely, it does. Now they will have more revenue (and a more focused revenue model) to license more content. Just check out their latest deal with Dreamworks.
Streaming will some day have problems because of price from isp and weather.dvd’s will still be able to come.but streaming can be cut of instantly. Think about it.
It seems like any uproar is from folks who are either:
1. Still in the idealist phase – where they can’t simply dislike something, but have to rant about it like it’s an actual cause for the betterment of humanity – no matter how small (i.e. Instead of saying “Justin Bieber isn’t my cup of tea, I’m going to listen to NPR instead”, it’s “Justin Bieber is contributing to the downfall of Western Civilization.”)
2. Too entitled to want to pay for entertainment – yet not understanding that their subscription cost could actually go down (most likely, see #1).
3. (I was going to say something about them having less money to spend, but really Netflix is not a necessity. So, I’m sticking with just two reasons.)
The *recent* uproar is because of the stupid separation of the web sites. As I explained in another reply, I am now a DVD-only person, and was planning on becoming DVD-only since the price increase.
However, I was very seriously thinking about switching between DVD-only and fewerDVD/streaming on a month by month basis (or maybe only in the summer when I would watch more streaming stuff).. But with the separation of sites/queues, I will NOT do that, at least for a long time.
So Netflix is shooting themselves in the foot by trying to get people to go streaming by separating the services.
Meh. It’s a matter of knowing what you want to do instead of trying to do everything just because you can. I’ve seen personal lives unravel over this, because people just can’t prune their decision tree. In both cases, it seems that Netflix (not a user, not a movie-watcher or media consumer here) simply decided what it wanted to do and did it. In the first case, the whole point of Netflix was that no one had to own a DVD anymore. Hence, selling them was like a tire store in the 1890s also selling horseshoes. Eventually, you have to fire the farrier. Nowdays, it’s the same. The whole point of streaming is that you don’t need a physical medium anymore. (Whether this is culturally wise or not in the long run is another matter.)
But still, if you’re selling tires, fire the farrier.
Of course some people have to own a dvd. And even more have to rent them. If you want to watch a movie that is not particularly popular buying or renting is the only option. How many movies, tv episodes, documentaries and other videos have been made? A million? Ten million? They can’t all be streamed. Not everyone limits their viewing to the latest and most popular movies or a back catalog of public domain items.
If I may miss the point for a moment: I feel like you just Googled when cars were invented for this analogy. Not enough people were buying tires in the 1890s to justify selling them exclusively. I’d stick to the horseshoe business.
Great post, and thank you.
I first heard about the Netflix split on the radio driving home from work, and my initial reaction was “Well, that just makes sense.”. Movies-by-mail is significantly different than providing streaming content, both from an audience and an execution perspective. Two products, two different models, target audiences and different dependencies. Branding them the same would do more to confuse than to elucidate, anyway.
I was shocked to hear how badly the general population was taking this. From a user perspective, all you basically did was change the name of one of the two services. Other than having to add a bookmark to their browser, its really no skin off their teeth, right?
The company I work for offers web analytics survey solutions… one targeted at the larger enterprise (Fortune 500 or Fortune 1000), while the other is targeted to the SMB-type website. Yes, it might be simpler to treat them both as a single product… but with the audiences so different and the sales methodology being polar opposites, it just works better to treat the two separately.
As for a minor price raise? I’m in Canada and don’t get the same movie selection as my neighbors to the south, but the small price increase isn’t really an issue when you consider what just going to just one movie theater per month costs.
“Other than having to add a bookmark to their browser, its really no skin off their teeth, right?”
wrong.
Many of us will continue to use DVDs for the foreseeable future in addition to streaming, especially because the content extortionists have a stranglehold on Netflix’s supply, meaning that some of the best movies/tv shows aren’t available right away for streaming (or never will be).
Yes, this appears to mean “just” two bookmarks, but it also means maintaining two separate queues, with no way to move items between them when they actually do become available. A friend mentions a movie, it sounds interesting, I hit a button on my DVR and look at the Netflix listing. Oh wait, now that’s only a third of the titles actually on the market – if I don’t see it there then I *also* need to go turn on the computer and see if it’s available on disc. And if it does become available for streaming before it comes up in the queue, I’ll never know about it; today it shows in my streaming queue automatically.
There’s also the question of the much-vaunted Netflix recommendation engine. Breaking the sides of the business into two separate entities means that no longer am I one person, one customer with one set of movies on which to provide recommendations.
The thing is that most customers saw Netflix as one cohesive, convenient movie/TV provider — and a damn good one — not two businesses that we had to think about… until now.
I agree that the DVD business needs to die, but disagree that this was the best way to do it.
From a user perspective, they did a lot more than change the name of one of the two services.
Because Netflix has an incredible dearth of titles via streaming, the current user process goes like this:
1 – Go to Netflix
2 – Enter a search
3 – See that the movie is unavailable on streaming
4 – Add that movie to your DVD queue
During this process, the movie might come available on Streaming – in which case, an available date pops up on your DVD queue, letting you know.
The new process for users is like this:
1 – Go to Netflix
2 – Enter a search
3 – See that the movie isn’t available on streaming
4 – Go to Qwikster
5 – Wonder why you’re paying for a service called Qwikster (which the former CEO can’t even spell right, it’s so forgettable)
6 – Search Qwikster
7 Add the movie to your DVD queue
So the process is almost twice as long. And that doesn’t even account for things like Netflix’s ratings system, which they touted for a long time, now not talking to the Qwikster rating system. So the discovery process is now flawed, because it’s on me (the user) to rate a movie in 2 places.
Ultimately, it’s a huge user experience change for the negative…one that could have been abated by Netflix deciding to link up the two services.
At this point, unless a magic genie gets them more streaming content tout de suite, I & a number of the people I’ve spoken with are looking at canceling streaming, because DVD at least provides us with the movies we want to see. And now that the systems don’t talk to each other, there’s no reason to stick with NFLX – the only reason I was sticking with it for streaming was the UX.
The streaming selection just isn’t currently powerful enough to stand on its own. It needs to ride on the coattails of DVD, until its library catches up. And given the way this was handled, I (sadly) no longer think it will.
I already did cancel streaming, and so did a couple of my friends.
Though I did cancel streaming, I’m actually NOT one of the people who thinks the streaming selection is awful. There’s *TONS* of stuff already that I would watch via streaming… I just want the extras + subtitles on DVDs.. Plus being able to skip back 8 seconds without waiting another 10 or whatever for it to resync.
I totally agree with you. The physical disc business has more home theater owners as customers. These people want more Blu-ray titles for rent and value the highest quality presentation. They also tend to be more affulent and are more apt to buy discs also. They may stream sometimes but are of the opinion that when it’s time to sit down and watch physical media is still the best. By splitting the business these customers will be better served in the future by management focusing on that side of the business.
As will the streaming side. I think will also see that the bulk of complaints will come from the streaming customers. Most people who are serious about their physical media are not swayed by ratings and recommendations,they know what they want and will have no problems with a second possibly bare bones site.
if I could ask a favor of Netflix it would be if to keep all the social media clutter/crap on Netflix and don’t port it over to Quiwkster when it’s ready.
I personally love the change.
I remember when Netflix sold DVDs. I kind of miss that.
I am happy about the move, especially since at the beginning of the summer I switched our plan from 3 DVD’s out to an unlimited streaming only package. I am just not that good with the DVD’s, we get them and they seem to stay here forever before we finally get around to watching them. Where with the streaming whenever we want to watch a movie we simply switch on the Wii and find something to watch. I hope the new releases start hitting streaming faster though… that’s my only wish for the new Netflix.
I just wanted to say “hi” to someone with the same name as me! So cool! :)…. oh and I agree that streaming is so much easier!
This was pretty much what I was going to write. The new releases are …so……lagging.
A great insight from someone who was there at the start of Netflix. I have written far to many blogs on Netflix for someone who has never worked there, but as a fan of the brand I wholeheartedly agree that despite the current grumbling of other loyal customers, by focusing on streaming Netflix is absolutely doing the right thing. It’s a tough realization that we’re going to have to weather a tough period as Netflix tries to improve their streaming catalogue, but as you point out it’s got to be to the business’ long-term advantage in the end.
I think they’re also weathering a tough period in large part because … well, everyone’s economically paranoid at the moment and scared. The economy has passed the toilet and lodged itself in the septic tank at this point, so ANY change of any kind is going to prompt a fear-based reaction. Netlifx could announce that they discovered an oil gusher or a diamond pipe in their backyard, and their stock would fall.
Pingback: Did Netflix screw up? I don’t think so. : alexking.org
I don’t think they goofed either. Everyone loves Netflix, it’s no big whoop. I think they goofed on charging everyone more without a simple, “hey, p.s.” but other than that.
Personally, I think Netflix could’ve taken a page out of Facebook’s page during this transition. Granted I have no idea what type of financial impact they’ve suffered with people jumping ship due to the membership changes, but there’s something to said for making a business decision and sticking with it–whether that’s a change in business model, pricing, or News Feed format.
Again, I realize the fundamental differences (Facebook is a free service, and Netflix is a paid-for membership program)–but coming back and saying “I’m sorry” makes me think you didn’t think through the decision in the first place.
Just a thought.
He did not apologize for the decision. He apologized for the way the decision was communicated. So, it does not mean that he did not think through the decision in the first place.
Get rid of so called cash-cows and invest in stars: that is basically what Netflix did on a typical BCG chart. Specialization is another marketing grounded concept. You need to do some estimations and calculus to be sure of such a big change, of course, but it is simplistic to say it wrong just because you are disappointing your customers in the short-term.
On the one side you own the DVD business that can turn unprofitable in just few years. On the other side you have an online branch that can exploit an extraordinary scale worldwide, but it has to expand wide and fast or all those big giants of the internet industry will attack you on several fronts. only-the-brave. Go Netflix! and come to Europe massively please!
Very interesting views from someone who obviously knows his stuff. I made a tongue-in-cheek post against the Netflix split last week but I can’t deny the move required a huge set of…guts. One question I do have though is what Marc thinks about the name Qwikster. I read somewhere that the name basically violates every key rule for naming a business. Chiefly, there are too many ways to misspell it, the handle was unavailable in some key social media outlets (ie: Twitter), and the ‘-ster’ suffix brings to mind hundreds of failed .coms from the 90s.
Pingback: Netflix: Down but not out
Truthfully, I have gotten to the point that I rarely order a DVD from Netflix. We don’t have cable, and almost all of our viewing comes from Netflix streaming. Lot of great documentaries. Lots of great indies and foreigns. That’s what we like. If I want to see something that Netflix doesn’t stream, I don’t mind paying the $2.99 or so through Amazon. At least I don’t have to go down to Blockbuster. Redbox? Forget it. They don’t have anything good.
They’re losing Disney? Good. That means I don’t have to listen to that Zack and Cody crap that my kids are always watching. I assume that the new focus, however, will allow them to improve their streaming content. Time will tell.
I have a brief comment… about your formatting. I’ve just learned that we two-spacers are wrong. It is incorrect to put two spaces after a period. But I’m here for you, man – we can make it through this.
Wow, really interesting post. I love hearing these stories from business creators. Hearing the risk really makes it realistic to know that creating something great and keeping up with the times isn’t always received with open arms. Very, very interesting!
Well, i see a lot of allusions in your statement. to the fittest go the spoils. streaming king and blu ray/dvd dead. i’m glad you think you’re oh so brilliant that you if you were in charge would still piss on me without even the decency of calling it rain
Streaming is DOA, so long as the library is 3rd-rate and delivery is subject to caps, throttling, overages and reduced bitrates. I’ll gladly wait for my Blu-Rays to come in the mail.
Sorry but your blog sounds like they have you in their pocket. The “pricing prize” will be strictly for them and not the consumer. They have shown through their arrogance and dismissive attitude that customer satisfaction means little until it affects their bottom line (thus the apology). I figure they are pushing the foreign business aspect and shoring up their bottom line for a sell-out. Much easier to sell a streaming business than a dead in the water DVD business, so they split it. They have limited streaming content and pissed off customers–a match made in heaven?
Not all of us have streaming systems hooked up to our TVs. Some of us like watching DVDs – or HAVE to, because the computer modem is elsewhere and we aren’t rich. I’m never one to balk in the face of change, but this complicates things for a lot of lower-tech or lower-income people, like me and folks in our income bracket. I liked being able to occasionally stream when I was office-bound, but this throws a monkey wrench into everything.
BTW, I’m sickened by the fact that most of the comments have been about the stock price. SCREW WALL STREET. Think about consumers first, the little guys.
Amen!
nice!
“By freeing our designers from having to create a sign-up flow that accommodated two types of business, we were able to cut out steps, clarify instructions and simplify the process. Conversion went up.”
So, have two separate sites, or am I missing something here? This all sounds like post hoc justification to me.
Exactly! How is splitting in two making things easier? It sure isn’t making things easier for subscribers!
Are you implying that Netflix is dropping or spinning off the DVD service? I know it’s got a new name, but won’t Netflix still own it? Won’t there still be a dual service from the same company, but for a huge price increase?
But in truth, the real question is what can Netflix or Amazon do about the movie studios? The streaming selection is skimpy compared with available DVDs. I know people point out that a large number of movies are streamed, but I have never found that either the clunky interface or the recommender is of any value whatsoever. And almost all the time when I get a whim to see a certain movie, or a certain director’s work, it’s DVD-only.
I was actually wondering when Netflix was going to split their business. I mean with all the instant things you can watch PLUS nearly 6 DVDs a month (if you’re totally awesome like me and watch them the day you get them and return them the next day) it’s a steal for under $11 a month. It was almost to good to be true for a couch sloth like me. So, I’m rooting Netflix on because now they’re actually getting their money’s worth. And I still am too. It’s all you lazy people that are complaining.
Lazy? This doesn’t make any sense to me. Why would people be complaining about the split because they’re LAZY?
Lazy meaning that they don’t turn in their DVDs enough to make it worth it to keep both mailing and streaming. It’s financially sound to pay what they’re asking. $16ish bucks for five or six movies and streaming is a good deal. But for those LAZY people out there who only mail in a dvd once or twice a month, then no. It’s no good because they’re not taking full advantage of the system.
I was disconcerted when I first heard ofthe change and I was little flustered at first. The instant play is good because it’s, well, instant. But it doesn’t have nearly as many movies that are available on DVD. However, when the news settled in, I actually didn’t mind the idea. The future is online streaming. Even blu-Ray will become obsolete. The name of the game is change. I agree that this is an excellent direction for Netflix in the long run, despite these current repercussions.
The first thing they teach you in business school: core competencies. Know what you’re good at and why you’re good at it. Core competencies are the bread and butter for every firm.
It is beneficial for me or even each person to read what the creators of large businesses think and how they see those business moves.
I have learned much, thanks!
The roadside is littered with great ideas that were poorly executed. Reed’s mea culpa and pirouette did little to renew shareholder confidence. You can do 1000 things in a row right and then just one thing wrong – we know what people will remember.
I thought the whole thing was crazy, and then I thought about it from the Netflix point of view instead of the customer’s and realized it was fine. I just hope you never split the DVD business into D and VD – no one wants either of those.
Interesting post. I am starting my own online business and love gathering this type of knowledge.
I understand that Netflix has a strong track record for innovation and honing creative new services, and that this move will perhaps allow them to streamline the process. Still, I think that a lot of people appreciated Netflix precisely because they were able to enjoy both services, and the split prevents those accounts from interacting the way that users are accustomed to (if you rent a Quikster DVD, for example, it does not indicate that the film may be available on streaming.)
On a broader level, I think that every move like this that Netflix or other contents deliverers make just incentivizes people to download illegally.
What planet are you on? By clearly investing in streaming as the delivery method of the future, distinct from DVDs-by-mail, Netflix is aiming to make streaming as convenient and affordable for the public at large as possible. If anything, studios should be clamoring to get in on this because it will reduce illegal downloads.
Unfortunately, the studios haven’t been rushing to Netflix because they think it’d reduce illegal downloads. Instead, they’ve been trying to restrict Netflix to protect DVD sales. In the past, Netflix has used delayed DVD rentals as a carrot to get more streaming content (and lower DVD prices). Once that’s no longer an option, how will they deal with studios that see Netflix as a dumping ground for fourth-rate content that wouldn’t make them money if they sold the DVDs for a nickel?
I fear that the new streaming-only Netflix will find itself unable to get good new content. This, in turn, would mean less subscribers and less ability to negotiate for content. Perhaps the DVD-Streaming split was inevitable, but I think it was a bit too early.
They have shown through their arrogance and dismissive attitude that customer satisfaction means little until it affects their bottom line (thus the apology).
When you use a sentence word for word from my comments it is typically good practice to attribute by at least quote marks.
We cancelled our cable and went streaming only earlier this year using a Roku box with Hulu Plus and Netflix.
The results have been largely positive. We don’t miss the extra programming and enjoy having extra $$$ in our bank each month.
We seldom used the DVD option on Netflix, but it was nice for the simple reason that the streaming catalog isn’t nearly as complete. If by separating the two services out they can get the same content on streaming then I’ll call this a success. Until then, however, it just smells of greed to me.
Time will tell. . .
Netflix is a good example of an increasingly apparent side-effect of the high rate of change of recent technology. Successful companies, by which I mean organizations that remain profitable and cohesive long-term, must make changes faster than their customers want them to, or else be made irrelevant by another that does. It’s simply that technology is changing faster than most customers can adapt to it, and to move forward requires that new customers who have already adapted must be found, leaving the others behind.
wow really thats not cool now i gotta sign up for another service to get the dvds well i think now ima just rent the dvds from quickster and forget about netflix all together. an epic fail in my opinion
The real reason for the split is that, with one queue, the fact that 90% of the content is not available to stream screams out at you. Sort of like a plain Jane standing next to a fox. So, Reed thinks, better to put the pig (streaming) into a separate pen. Makes sense to me, but who are you really kidding?
Marc, as an early founder of Netflix I suspect you still have quite a few shares. If so, you really should have disclosed that somewhere in this post since obviously some of us might reasonably conclude that would influence your opinion. Obviously, if you hold a lot of stock, suggesting that the market and customers are wrong and the stock should be higher is self-serving and we might all just ignore your opinion… unless you told us and explained why it didn’t matter. Which you didn’t.
Exactly what I was thinking and forgot to note myself. I’m sure the sale included stock.
Interesting angle to the story.
Hastings did such a bad job at communicating these changes that it’s hard to focus on much else. If he were really the “best entrepreneur on the planet,” wouldn’t he know enough to ask for some PR or copywriting assistance?
His email/blog post was a train wreck! It looked like spam, every other sentence started with “I” or “we” (showing more concern for himself than his users), and it was way too long for the average reader. Check out more of his copywriting blunders here: http://blog.sfcopywriter.com/2011/09/20/netflixs-big-goof-5-blunders-in-its-recent-announcement/
Pingback: Did Netflix screw up? I don’t think so. | slopestreetcats.com
Pingback: Marc Randolph: Did Netflix screw up? I don’t think so. | Urban Onramps
I think it’s fitting that when I initially read the article, I thought it said “the big prize, which is clearly steaming…”. I understand the idea behind the split. Really, I do. And the creation of Qwikster honestly didn’t bug me in the least. It’s everything ELSE that Netflix has done for the last 2 or 3 years that has bugged me. I first joined in 2006 and quickly convinced several of my friends to join with me. We all enjoyed the social aspect to it. Netflix offered a really unique “Friends” feature that enabled me to see what they were watching, what they had added to their queues, and what they had rated. It also had a “Lists” feature, wherein users could compile their own lists pertaining to whatever they felt was pertinent. Last but not least, there was a review option where users could write their own reviews, and see how similar other reviewers were. In short, it was social and it was fun and it helped users fill up their queues with movies that they could enjoy. The films they were selecting were far more likely to be something they’d enjoy. I loved Netflix and was thrilled whenever I’d turn one of my friends onto it.
First, Netflix axed the “Friends” feature. Then they axed the lists. Reviews are still up, but the feature has been lobotomized to the point that they’re completely useless. I have no clue if a reviewer’s opinion has anything at all in common with mine, nor do I know who left the review. Presumably, this was all done with the idea that it’d make it easier to stream content off the site. That may be true, but it also took away what made Netflix unique and turned it into just another movie site, no different from Redbox or Blockbuster. The only real edge that it had- and this is why I’m still there- is that the selection was really quite impressive. But then came the price hike, along with boatloads of films disappearing from streaming availability. Criterion signed with Hulu. Starz went bust. Suddenly, Netflix users are being asked to pay more to receive less. The cherry on top of the sundae in all of this came the other day- the split, along with a really goofy name for the DVD-by-mail service and a mea culpa NOT that they’d done anything wrong, but rather that they didn’t communicate very well. It’s a start, I guess. It’s the first time I’ve ever seen Netflix even acknowledge some of the concerns of their customers and it feels like far too little, too late.
Combined with the loss of Starz, Walt Disney, Sony, and (most importantly to me) Criterion, and in a tight economy, it seems to be the worst possible time to ignore customers. If you want to push everyone to streaming, that’s all well and good. But it doesn’t mean a thing if the content’s not there, especially when you’ve got loads of customers ready to jump at the first company that can approximate your services.
Pingback: Netflix co-fundador: Qwikster es su más inteligente, más valiente aún se mueven - Actualidad
Pingback: Marc Randolph’s Post About Netflix « Market Squeeze – Stock Market Madness
Pingback: Netflix co-founder: Qwikster is its smartest, bravest move yet | Technology
This is a very well-written and informative post. Thank you so much for the insight into the behind the scenes!
Pingback: [News] Ce qu’il faut savoir ce matin | FrenchWeb.fr
This is the first I’m hearing of this as you have been freshly pressed. Though I know nothing about business all of your reasons make sense to my lack of knowledge in the field. I’m glad you’ve clarified the implied ideas behind this move.
Change is always good!!
Great post anf congrats on FP! 🙂
While ever DVD and online movie rentals are so expensive people will download elsewhere.. A movie should b no more than 50c and a TV show 5c. But while you pay anywhere from $4 to $7 to rent a movie from Itunes or netflix they will be doing themselves out of money. I have no sympathy for them
Almost all corporations can juggle several balls at the same time. To split the DVD business while the stock is in freefall makes no sense, even if the overall plan does. Hastings has said he doesn’t care about the stock, but he sure as hell should care about stockholders who have seen their shares carpet-bombed. I do believe we’ll see Netflix back to $300 by January — if management can avoid any more colossal PR blunders and get the big content deals in line.
One big misconception out there is that Netflix streams little content of value. In fact, it has a rich catalog of cinema and TV from across the planet. This despite Big Blunder No. 1, losing the Criterion Collection to Hulu.
I’ve loved exploring Nordic noir, the Japanese lunatic cinema, arthouse fare, UK television such as “House of Cards,” etc. Somehow, Netflix needs to get out the message that it’s not in the latest and “greatest” hit movie biz — but it offers amazing adventures in viewing.
Nice review.
However, in your case (early Netflix time) you were not loosing half the share price nor you were loosing your huge customer base. The company was young , had lot of flexibility.
I would not make such a radical decision for an established company which will cost half the share price and established customer base.
Loosing so much in a bad economy is really bad decision
It’s pretty clear that streaming video IS the future. However, while the reasons for splitting the company might have been well thought out, the communication method was horrible. Also, the whole ‘two queue’ bit takes away from the convenience of it all.
I used to work back at Blockbuster ‘back in the day’, and I remember when DVD’s first came out. The collection started out small, and then gradually increased over time. They didn’t split the store down the middle, call the DVD section ‘Blockbuster’ and the VHS section ‘VHSter’, and jack the prices. While Blockbuster failed in innovating distribution methods in time, they were just fine when DVD’s came on board; they didn’t have to tarnish their brand image to get the job done.
If I were Netflix, I would hop quickly on putting a lot more emphasis on the streaming business. I, for one, don’t have cable TV (saves $100 per month), and my wife and I watch TV ‘by the drink’ on the network websites – this will be the direction of media. The tricks at this point will be timing and money; knowing how to ease off of the DVD service, while opening up the wallet to make solid deals with distribution channels, preferably sooner rather than later. For what it’s worth, I blogged my frustration about this topic http://themanoftheminivan.wordpress.com/2011/09/19/another-explanation-and-more-reflections/
Note: It’s less about Netflix, and more about how the CEO handled the situation.
Popcorn distracts me.
And I don’t like capitalism.
Pingback: Netflix: Down but not out | Netflix No
Pingback: Quora
Thanks for the look behind the scenes and the perspective that goes into the decisions. As a current (and longtime) customer, I have been a little frustrated with the change but am hoping that the ability to focus on the streaming will ultimately improve the experience… and make the current pain of not-enough-streaming-selections a short-term issue.
This is a good article. You make a good point and have sound arguments. I was starting to freak out about my Netflix stock, but now I think I will ride it out and see where it ends up. Thanks!
I like the fact that the “Qwikster” name is so stupid that even the co-founder can’t spell it right in his blog post. Folks never hearing it before will think “Quickster”. But then you have to replace the ‘u’ with a ‘w’ and also take out the ‘c’. Very unnatural. But still, the fact that Marc Randolph can’t spell it right in his blog post just makes me smile.
My husband and I may be in the older category, but I can honestly say we loved the downloading. This is in the past tense though; as most of the dvds we wanted were the mail out kind and we did not want to pay for both services….just wanted to have ALL the movies available on download. We will check in again in a year or so..
I am really inspired with your writing skills as neatly as with the structure on your weblog. Is this a paid subject matter or did you customize it your self? Either way stay up the excellent quality writing, it is rare to peer a great weblog like this one these days.
-Ryan
http://energizeyourlifetime.com/
Pingback: Netflix CEO Reed Hastings Appeared on ABC’s Nightline : 404 Tech Support
I agree with at least one comment above: the author here likely has more than just personal satisfaction to gain from Netflix’s continued success, so I’m taking his perspective with a grain of salt. As a Netflix customer I am dreading the switch to two different services and the price hike, but I also understand the growing fundamental differences between the streaming and DVD business. Of course Hastings’s communications were abysmal. I never felt so angry after reading a mass dissemination.
I would hate to work at Qwikster, personally, because I’m assuming it won’t function long. We only have a few more years at best for most people to be actually using DVDs, and now it will be easier for Netflix to phase out that part of the business in favor of streaming when DVDs inevitably are obsolete.
Interesting assessment (although a tad bit too long winded for my taste) but I completely disagree. I think its the wrong direction for the company because is some ways is kills off other business’ like gamefly and redbox. Basically, netflix is the Microsoft of online media and its taking unfair advantage. I think its the wrong direction.
A well-written opinion on what I still believe to be a highly-questionable decision by NFLX. One thing is for certain, at least in the consumer-convenience world: as long as a service is still convenient to the customer, they will continue to buy-in regardless of the changes.
Interesting perspective. I never really thought about it from a relentlessly focused point of view. It’ll be interesting to see how this all unfolds and if Netflix can remain the dominant streaming provider or if companies like Amazon (or whoever buys Hulu) comes in wins.
It seems to me that most customers’ problem isn’t with the split itself, it’s with the price increase. Those who were only doing one or the other (only streaming or only watching DVDs) haven’t been too affected by the change. But those who were using both are not happy about having to pay, at the least, twice as much for the same service. I can see how the decision makes sense for the company, and even for future customers. But a lot of exisiting customers aren’t happy – and for good reason. The fact that it’s still technically a “good deal” doesn’t make the price increase any easier to swallow, especially with the economy/job market being so unstable. People want to feel like they can still afford some luxuries – and the difference between $8.99 and $15.98 per month might be the deciding factor for some folks. It’s just disheartening, more than anything. Seems to me this would have been a better move if they’d strengthened their streaming selection first. The price pill might not have been so bitter if customers felt like they were getting something more for it, instead of the same service – less once Starz is gone. And the Dreamworks deal is so far off…..I call bad timing.
Marc, thanks so much for posting your perspective. It is nice to hear a logical explanation of the strategic moves Netflix made in the past few weeks from someone close to the company. Incidentally, I wrote about the same issues on my blog last week, and I am happy to see that my analysis was not far from what you are saying. If you are interested, you can check my postings here:
* Why I Think Netflix Got Its Pricing Hike Right (http://wp.me/pVrfU-2y)
* Netflix’s Move to Separate the DVD Business Is More Than a PR Excuse for Price Hike (http://wp.me/pVrfU-2T)
Cheers!
Emil
if you are so upfront, why not tell us what’s going to happen. when is the dvd business going to die. surely you would know that. hell’s broke loose in Georgia and the Devil deals the cards!!
What the heck is a name like Qwikster supposed to convey to current and/or potential customers? (And presumably potential acquirers, though that’s doubtless down the road a bit.)
What immediately came to mind for an old guy like me is a breakfast cereal from the late ’60s/early ’70s that would send me ping-ponging around the house like the Tasmanian Devil for about an hour or so after each dish. I think Mom didn’t link cause and effect until after I was midway through the second box…and, alas, once the connection was made it was no more to be found at our house. But, man, this stuff was like a sugar coated WMD wrapped in cardboard. (FWIW, I suspect my experience — and my Mom’s — was far from unique; in fact I’m guessing it got banned in homes from coast to coast. And I think it ceased production circa 1973 or so)
But…fuhgetabout Cap’n Crunch or Tony the Tiger or whomever. Quisp blew them all out of the water. Like grain alcohol vs. Miller Lite. And ain’t that little Martian guy cute?
Eh, sorry for that meander down memory lane. But whatever else a name like “Qwikster” does, it certainly does not make me think of a DVD by mail rental service. I hope they didn’t pay their consultants too much for a brainstorm like that one. And I wonder what, if anything, they’ll try to do to boost the morale of the employees who’ve suddenly become Qwiksterites? Free Qwikies?
Drat. I post comments so rarely I always screw up links when I do. And never seem to learn. Well, here’s the direct link I tried to embed.
Pingback: The Case for Screwing Up Netflix
I am saddened by the fact that over half the world does not have the internet. Here we are moaning and bitching about a way of viewing “entertainment” Really who gives a damn about this.
And an earlier post stated that this message was brought to you by someone who probably has a vested interest in seeing NTFX prosper even though he hasn’t worked there in years.
If I need to see something that badly, I’ll buy it elsewhere, I’ll own it without this drama, and hassle. Frankly, I’ll read a book, or maybe my kindle?
I don’t think that many people dispute why he did what he did. It seems to be more about having to pay for a poor service that we didn’t use (the streaming, of course) that was tied with a service we loved (the DVDs), then being expected to pay more, all while a company tells us that they have a great selection of streaming videos when it clearly doesn’t. The price increase isn’t terrible by itself, but you tie that to a disingenuous message and you’re headed for disaster. It seems reasonable to think that while Netflix is trying to position itself for the future, which is admirable, the way they transitioned their company and customers has been less than spectacular… and less than professional.
The problem with your analogy is that DVD rentals and DVD purchases are largely fungible, once you get people to buy into the rental model. If you want to see a movie, it doesn’t really matter whether you rent it or you buy it. The Netflix streaming and DVD services are complementary, not fungible. If you want to watch a particular movie, chances are really, really good that it’s only available on disc, and the odds it’s streamable go down significantly if it’s not an obscure documentary, indie, foreign title or old TV show. So now Netflix has to completely change viewers’ habits – you don’t decide what you want to watch and then pick the delivery medium; you select from the very limited list of things Netflix has available. The streaming service was serviceable when you could supplement it with DVDs. Without DVDs, it’s useless for mainstream customers.
I still think the communication of the change wasn’t very good at all.
I understand why this makes sense for their business for the reasons you stated, but I still dislike the change. I enjoy the convenience of one site to search for movies and add them to either queue. Splitting the sites just makes things more inconvenient.
Of course, if you actually consider them as ‘separate companies’ it wouldn’t make sense for them to merge their searches and things, but we’re used to seeing them as one service to watch movies from. I was going to keep both services with it being sold as one product (even with the higher price), but the separate site move makes me want to drop one or the other.
Wow – very interesting post. Really does show how it is so important to know where you are going, not just today! Thanks for sharing!
Pingback: What is Qwikster and Why? « My Other Blog
Pingback: Netflix’s Move to Separate the DVD Business Is More Than a PR Excuse for Price Hike | Emil's Cerebrations
Fantastic analysis from a former insider.
Is it time to invest in NFLX after they took a beating?
http://www.stillperception.wordpress.com
Pingback: Netflix co-founder: Qwikster is its smartest, bravest move yet | TechDiem.com
Your article really did clarify some things up for the Netflix stuff. Congrats on getting Freshly pressed.
However, it seems to lack some connection to the actual consumers, and I’d like to enlighten you on exactly why it’s such a big deal to custimers.
The reality is by splitting into 2 different companies Netflix is making their customers who want both online streaming and DVDs by mail, juggle two log-ins and pay a whole lot more. That’s what people don’t like it. Netflix is popular because it’s cheap entertainment and you can watch it whenever. At the former price $7.99 to $9.99, you had unlimited movies, tv shows and the ability to watch them anywhere or at home. Much cheaper than going to the movies.
People who have recently had to downsize or lost some income, Netflix is their only source of entertainment. I know plenty who cut their cable for netflix. It was cheaper, efficient and overall their solace in their conflict-ridden lives.
In almost every economic downturn the U.S. has turned to Media in order to ease their woes for a few hours. 1700s-1800s-It was novels or serialized stories, 1880s-1910s it was Vaudeville, 1920s-1950s it was the movies, 1960s-1990s-Concerts and now it’s netflix.
The working class has been paying for their dreams, everywhere. Raising the prices, makes it unaffordable for most of netflix’s customers now. There goes their sense of value (consumers have frequently looked in companies for their value because of the purchasble desire market), security (that they can still afford to entertain themselves), entitlement and how they’re going to spend their time after getting off of work.
That’s why it’s a big deal. Not because the customers aren’t thinking of the companies eases, but because they’re losing what makes their lives easy.
And now my faith (what little there was not being a customer) in Netflix has been restored. I still think it was a bonehead move to outright change the name to Quixter and lose all brand recognition, but I respect that company a lot more now.
If only we could get the government to “scrape the barnacles”. Maybe then we wouldn’t have so much dept.
Interesting post and some interesting responses. I think any brand goes through hard times when they are making huge, brand changing decisions. I realize I might be in the small minority but I still love picking out a DVD and holding it in my hand to read all of the information on the back. Not sure if I will ever warm up to streaming.
Pingback: Tickle My Mind… « The Waverley Tattle
I’m surprised that there aren’t multiple pricing tiers within Netflix streaming. Why not pay $30 a month to get every movie? Maybe this is in the works and a driver for cutting off the dvd rental business?
@ aspiringtobesomeone
do you NOT get the economics of the Netflix situation as well as its desire to focus on what it sees as its core business?
Marc’s commentary here is the first non-knee jerk reaction I have seen from anyone on this topic! The whole situation is clearly demonstrating that we live in an entitlement state! When anyone with ANY intelligence examines the situation, they see the following:
1 Streaming is Netflix’s focus
2 The content providers are planning on charging as much as TEN TIMES previous licensing fees.
3 If Netflix NEEDS to be acquired, their streaming only business will be BY ITSELF, the most appealign target.
4 DVD business is stable and predictable where streaming is not! The split allows for ‘ survival pricing ‘ of its streaming product should the studio licensing greed gouging increase by even more in the future.
So yes this change affects the user but it doesnt affect the value of the service nearly as much as everyone is bitching about. I dare any of the whiners to find even a comparable service at this point in the marketplace!
I didn’t know that people are charging 10 times as much as they were. Good to know. Thank you for informing me. However, I don’t like the implication that I’m unintelligent.
However, I’d like to inform you about the many services that are similar to Netflix and many that are cheaper. Netflix is just the google of this particular market.
well, get rid of entitlements. invite bachman. she wants lower gas. i guess she’s about entitlements then because she likes cheap. ha ha.
I think Qwixter is the best name to give a company that is working in a dying market. I half-think that they chose a poor name on purpose, to make it unmemorable compared to the enduring Netflix brand, where the future still looks bright.
It’s an interesting juxtaposition of corporate cultures to compare Netflix (which figured out that selling DVD’s was a futureless business years ago) with the studios, who are trying to sabotage Netflix in order to protect their DVD sales. Granted, the behemoths can’t turn on a dime like a smaller company, but it’s remarkable how behind the curve they are.
It’s really apparent that little thought went into Qwikster’s creation; they obviously see it as a short-term project that will be dying for most of its existence.
For all those complaining about the fact that streaming has a smaller catalog, I’ll just note that there’s no inherent reason why this should be so. Creating a packaged DVD requires a large effort – designing and encoding the content, producing the disks, producing the packaging, warehousing and shipping the product, and dealing with returns etc. Streaming is much simpler – you just encode and post the product info. The only reason we have such a large back catalog of DVD’s is because it’s an older format. In a few years I expect the availability situation to reverse, with many more titles available to stream than to buy or rent on disk.
Pingback: Collide Magazine | Blog – Relentless Focus
Maybe DVDs are a dying business (although they aren’t going away any time soon), but if I had to choose between streaming and DVD rental, I’d choose DVD rental hands down. In fact, that’s exactly what I’ve done.
The DVD catalog is pleasantly large, 1 day is not too long to wait (and we have Redbox for immediate gratification), it doesn’t chew through my allowed monthly bandwidth, the video quality is better, and I can access all the extras and subtitles. All in all, it’s superior to streaming in nearly every way.
So I’ve ditched Netflix and will see how well Quixster (or however you spell it) does. I’m hoping for the best.
Pingback: Netflix is Fine - Physical Media's Not Where The Puck's Going | Purploid
Couldn’t agree more. I’m a streamer-only and the website always had this half focus on DVDs and n Streaming. It was really annoying because with 10,000+ titles it is really heard to find a good one.
I would often browse for 10 minutes only to be frustrated by landing on DVD-only pages. Then I would leave the site. I hope that this move allows them to optimize the streaming experience.
Pingback: The Case for Screwing Up Netflix : Tera Code – Portal Information Service
Pingback: The Case for Screwing Up Netflix | Got2.Me
Pingback: Dear Netflix, WTF? | ChrisBoyd.net
I have been a Netflix user *since* the a la carte days (IIRC, it was $16/month for 4 rentals.. and at first, they wouldn’t roll over if you didn’t use them in a month.. then they did.. then it went unlimited). So for a VERY long time, Netflix has been getting my approx $20/month (grandfathered 4 at a time since the recent change).
I cancelled streaming and went *2* DVD at a time. So now, netflix is getting approx $8/month less from me. I was *considering* switching back to 1 DVD + streaming once in a while.. but the separation of the web sites will make me FAR less likely to do so.
I want the extras + subtitles on DVDs. I *like* the idea of streaming. It just didn’t get me everything I got on the DVDs.
I hope you are right, and mostly I agree with you. My friends have been up in arms about this change, I have been thinking. I’ve been thinking a lot actually, because I am looking at tablets now, and trying to figure out whether or not my experience and consumption of media will really change. I really really wish the tv and movie companies would pull their heads out of their collective butts and realize how much the technology and society have changed, but I doubt they will get it anytime soon. I want my tv shows when *I* want them, on the platform of *my* choice, from wherever I happen to be at the time. So I hope Netflix, with a renewed focus on streaming, will start making that happen. I’ve been at the 1 dvd at a time + streaming, and have found that I don’t use the dvd rental all that much. Movies that I truly love, I buy. Even with all the stupid upfront advertising and inability to just watch my freakin movie already! Movie companies are so stupid they haven’t figured out that pissing off the paying customer is a bad marketing move. This is the advantage of streaming, where I’m not forced to sit through 5-10 minutes of previews and advertising before I get to what I’ve paid for. Plus I don’t have to be at home, or carry a dvd player around with me. Just give me my mobile content, to fit my mobile life. Oh, and an app that lets me ‘stream’ something to watch on a plane later would also be nice. You all can keep your dvds, give me better mobile media.
Pingback: Netflix Co-Founder Defends Qwikster, Labels Spin-Off As Smart, Brave, Disciplined Move
This is exactly useful
Pingback: Virtual Education News from 360 Education Services » On Netflix, Qwixter, and Maintaining Singular Focus
I agree with a large part of what was said here… I just happen to think you could divest your business AND still maintain at least some modicum of integration between the two so as not to completely disrupt your loyal customers’ service levels and experience.
Those things aren’t mutually exclusive…
Pingback: The Fight to Become the Streaming Video King | Bulletproof Pixel
I’m interested to see how these decisions resonate in the future. Right now, people are just resisting this change as they do with pretty much all change (I mean, how many times are we seeing people complaining about the new Facebook changes on their news feeds?). So, when people have calmed down, adjusted to the new Netflix and gotten over it, I’m intrigued to see how Netflix fares.
I loved getting an inside view on how Netflix operates. Thanks for this informative post!
I appreciated the example about the potential payoffs of a focus on the part of a business with the most room for growth and innovation. However, that situation does not necessarily apply to the recent move. When Netflix moved to DVD rentals only, they were alone in completely new space where it was up to Netflix to figure out the best way to build a business where no one else was even looking (and leaving the one where they saw everyone else eyeing). This time, Netflix is doing the opposite. They are focusing on the aspect of their business that has the highest possibility of someone else “drinking their milkshake”. Everyone is looking at streaming as the future. Netflix will have to compete against actual content owners and many of the major media distributors in this very market very soon. Given the plethora of difficulties in licensing content these days, Netflix just put itself in a position to eviscerated.
While it’s true that Netflix won’t have the streaming market all to itself, I think this move could still end up winning for them.
The streaming market, like a lot else in the tech business, is all about network effects. Jumping into streaming with a small catalog is pointless, as customer aren’t going to have five or six streaming services; what they will have is one, or maybe two, big ones. To be viable, a streaming company will need one of the top two or three catalogs (preferably the top one). Everything else will be an also-ran.
Netflix is aiming to be the top streaming service, period, and the way to get there is to have the biggest streaming catalog. If they can get that, no one will be able to touch them, and the studios will have to deal with them. Separating the disk-by-mail service lets them focus hard on their main goal, and makes it more likely they will be the last contender still standing, which is all that will matter.
Netflix has always had a very progressive vission, and have always planned to move to a 100% video streaming model. The problem hear is “pitch” and “delivery”. They should have “pitched” the move to all streaming content better, and “delivered” greater variety of streamed content at the time of the break from DVD’s. The admition of “arrogance” by the CEO shows only that the welfair of the company, rather than that of their customers, was the primary focus here. Hmmm…disapointing.
thank you for sharing the true story… i’m totally with you… actually i wrote an article (in chineses.. i’m a writer in a taiwanese blog) few days ago on Reed’s move and it’s a great move : http://www.inside.com.tw/2011/09/22/reasons-behind-netflix-spinoff-dvd
I think it could be a real positive, good move for taking both divisions forward.
Initially I was very upset about the price hike and the separation of streaming and dvd. But then Reed Hastings sent me an email (it was the same one all customers got and that Netflix posted on their website) and I felt better about it. Suddenly it wasn’t just a faceless company screwing over customers. Netflix realized that people would ultimately be unhappy. They even prepared themselves for the fallout by projecting diminished quarterly sales. After I looked at the whole thing objectively and stopped being a whiny consumer, I understood what was going on and appreciated being kept in the loop. Further, the news about getting video game rentals just really brought a smile to my face. I had been wanting Netflix to do that for years and now they are. I’m still a loyal customer, albeit mildly annoyed, but I don’t fault Netflix. They are doing what is best for their business while still trying to take into consideration their customers. In the long run, but Netflix and its users are going to come out winning. Especially after that sweet Dreamworks deal they just acquired…
The split of disc-mail and streaming has nothing to do with the change of strategy from DVD sales to DVD renting which happened in last millennium and did not cost Netflix and investors $9 billions in capitalization loss in 20 days. It’s not 18,000 commenters that are wrong, it’s the whole marketplace. And by splitting, Netflix is still maintaining both services, not focusing exclusively on streaming.
You also seem to ignore that thanks to its unique integrated model, Netflix was able to serve many different types of customers. This is not happening anymore in the new streaming model, which has a few old and TV shows on offer. I don’t know the exact ratio on this day, but the DVD/BD service offers at least ten times more titles than streaming, including the Starz and Criterion titles, a better selection, better quality, and more features (audio and subtitle tracks) than streaming, and able to serve every single customer: Only few people have optical fiber connectivity, and standard 3MB/s DSL is very bad quality for streaming, with nobody else in the house able to use the Internet. Also, it was a cheap service, which many middle class customers could afford, which is even more important in today’s economical crisis.
I have no doubt that streaming will be the future indeed, but this decision is very premature.
This disintegration of Netflix is a disservice to customers, who now lost the integrated queuing, rating and billing systems. The 2 services should indeed probably be dissociated and priced differently, but not at the cost of added complexity and loss of some features for the customers.
Disc shipping is indeed a totally different infrastructure, but it will be a profitable service for at least 10 years, between the slow advance of optical fiber, the rural market and mostly the exclusivity deals and other Hollywood constraints that prevent Netflix from streaming good and recent content. If the split is the first step to selling this asset, this is a wrong business decision, as it could just as well been managed in its own division. If not, then why break up queuing, rating and billing?
Forgot to mention I quit Netflix following the insane summer business decisions, as apparently did thousands of other people. I got rid of streaming earlier, and now have quit completely.
Pingback: Netflix co-founder: Qwikster is a smart, brave move | Netflix No
Piss off enough customers that 28,000 feel compelled to post in a blog? How about the unheard millions and all those who cancelled and jumped off the sinking ship? Are they all wrong? Wall Street and subscribers are voting with their wallets. Sorry Netquickster whatever, you had a nice run while it lasted.
You’re right. Imagine if over 2 mill+ subs split. And with giants like Microsoft, etc. entering the fray, you could see an $80 stock price by year’s end.
Great piece!
Pingback: Investing for Nerds: Exploring Netflix
Pingback: » Another Reason Why Qwikster Really Was A Good Idea thinkabytes
Pingback: Very interesting take from a former Netflix insider… « The Tangled Slinky
Pingback: The Price Isn't Right: What New York Times, Apple and In-N-Out Could Teach Netflix - Forbes
You’re nuts. I shorted this at $250 when everyone thought no one save Netflix was going to stream or rent movies. Trading at a ridiculous P/E and with competition with deep pockets entering the fray, the stock had to come down to realistic valuations. And it did. Yes, it may get a bump when the company releases data showing that sub declines weren’t as dire as predicted. But it will tank when Apple, Google, Microsoft all enter the arena with their own serious product offerings. The writing was and is on the wall. Owning zero content and renting it at an insanely high cost (witness the recent terrible DreamWorks deal) with increased competition for A-list content seals Netflix’s doom. The brand is dying ever so slowly.
Unfortunately, Marc this post shows how painfully out of touch you are with the average subscriber and why Netflix and its new iterations are likely headed for the dustbin of history. It’s not 1998 anymore; new game, new rules. Amazon, Apple, Google, do MULTIPLE things well; sorry if I can’t conjure sympathy for what’s left of your brainchild because they can’t handle two. Gimme a break…
Marc, if anything you can glean by observing Apple is convenience. Simplicity. Jobs cannibalized his own cash cow, the iPod, when he realeased the iPhone, literally reducing it into an icon on the screen. Now iPads are taking tolls on laptops.
However, these latest devices are becoming all-inclusive; the iPad will incorporate more and more laptop functions, features. Big difference than Reed’s parcel off theory…
The convenience of having everything in one place across multiple devices that sync is the future; you think I or the rest of the subscriber-base are going to want to switch to a SEPERATE website or APP on our phone/tablet to order a DVD for say MAD MEN, S3 eps 4-6, because only part of the season is available for streaming and the rest on DVD? That was tedious even writing; imagine having to do it. But that’s a real scenario now that Hastings has gone this direction. And it’s why he’s losing me to Amazon Prime.
Good PR might’ve mitigated the damage. After all, the reason for all this chaos is actually directly related to the studios and networks being so parsimonious and technical with their product licensing and fears of losing DVD revenue.
Netflix in a sense, is being sacrificed because of the content producers (Hollywood) greed and the company’s avoidance of navigating that debate on the public front will ultimately spell its demise.
Netflix is a company to please stockholders now — not subscribers. I’m sure you still have stock, Marc, that’s a good thing. Seperated out, it will be easier to be sold off and subsumed; there’ll be some money to be made there.
@Gregory D Navarro – You just posted the absolute best summary and explanation of the issue I’ve seen yet. The number of people posting short-sighted “Oh yeah, I never thought about it that way!” appear to be lacking almost any ability to put these moves in the context of users and the marketplace like you just did.
A+
Pingback: Netflix Needs To Realize That The Price Isn’t Right | Netflix No
Pingback: The Price Isn’t Right: What New York Times, Apple and In-N-Out Could Teach Netflix | Netflix No
Pingback: Friday’s Reading List » PROSPECT Blog
Very interesting. I didn’t know about any of this. Thanks for sharing!
Pingback: Netflix Needs To Realize That The Price Isn’t Right | Best 2011 Cars
I agree with a large part of what was said here… I just happen to think you could divest your business AND still maintain at least some modicum of integration between the two so as not to completely disrupt your loyal customers’ service levels and experience.
What about now?
Pingback: Qwikster gets cold feet « ginger soup
I’d love to see an update post with Netflix’s “nevermind” move yesterday… Sort of undermines all the valid defenses here and substitutes them with unfortunate liabilities, I’d imagine.
Pingback: Netflix’s Qwikster Backtrack is a Bad Idea | Tech Dott - Daily Technology News Magazine
“Did Netflix screw up? I don’t think so.”
Well, Reed Hastings does, as he retracted the plans to separate Netflix from Qwickster in Netflix blog today. After losing $10.396 billions in capital loss in just 3 months, and the stock flaming down to its lowest price in over a year, at $107.31, in reaction to his “yet another” apology. That’s almost $200 lost on each share!
Pingback: TechFan.org » Netflix CEO: cable is still going strong despite online streaming
This article is very googd
great article!
Pingback: Relentless Focus | Echo Hub » Posts