Netflix’s DVD Split Is Yet Another Self-Inflicted Wound
Update: 10-10-11 from the New York Times, Brian Stelter reports:
Abandoning a break-up plan it announced last month, Netflix said Monday morning that it had decided to keep its DVD-by-mail and online streaming services together under one name and one Web site.
The company admitted that it had moved too fast when it tried to spin-off the old-fashioned DVD service into a new company called Qwikster.
“We underestimated the appeal of the single web site and a single service,” Steve Swasey, a Netflix spokesman, said in a telephone interview. He quickly added: “We greatly underestimated it.”
How many self-inflicted wounds can a company take before its mortality is threatened? When it comes to Netflix, the question is taking on increasing relevance. The company that could do no wrong for the past two years first shot itself by announcing an onerous price increase without any real attempt to explain itself or soften the blow. The initial consequences of that decision came last week in the form of a 1 million subscriber downward revision and a 50 point drop in its stock price. Now Netflix has followed up with another bewildering move, announcing a re-branding and separation of its DVD by mail business as “Qwikster” complete with an independent web site. In my view this is another self-inflicted wound with even more serious implications.
When Netflix announced the price increase and discussed its intent to charge separately for DVDs, it offered a nonsensical and incomplete explanation for why it was doing so, and why now. In a new and contrite blog post from CEO Reed Hastings (and accompanying video), the more explicit explanation is “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.”
Of course there are different economics and operational facets to streaming vs. DVD by mail. But guess what – subscribers don’t care. Netflix’s business is delivering entertainment as easily as possible, over any viable means and at the most attractive price. Rather than separating streaming and DVD, Netflix should be doing the exact opposite – integrating them as tightly as possible. Netflix has given a “we can’t walk and chew gum at the same time” explanation that is irrelevant to most subscribers, and only ends up forcing them to make unappealing decisions such as paying more, getting less or doing without.
For a team that made so many smart moves, it’s hard to pin down what’s going on here. Hastings offers a hint though in his post, saying that “Companies rarely die from moving too fast, and they frequently die from moving too slowly.” My sense is that Netflix has too quickly fallen in love with streaming, and forgotten how critical DVDs still are to their current and future success. I’ve been a broken record in pointing out that Netflix’s key competitive advantage relative to other pure streaming services (e.g. Hulu, Amazon, Vudu, etc.) is the CHOICE that the deep DVD catalog offers plus the complimentary CONVENIENCE that streaming has introduced. Without DVDs Netflix is going to going up against far bigger competitors without much of an advantage. As to Qwikster’s prospects, marketing a DVD only service in the digital media era? Good luck with that.
Worse still is that Netflix’s access to high-quality streaming content has never been more challenging. The Starz situation is illustrative of the conflicts and reluctance big media companies have in dealing with Netflix. The awakening of Amazon, Google, Walmart and Dish to the streaming businesses means far more vigorous bidding for streaming content going forward (and by the way these Netflix blunders are only going to drive up Hulu’s value given its exclusive lock on broadcast TV programs). Meanwhile pay-TV operators’ focus on TV Everywhere, and their willingness to pay retransmission consent fees, puts a further squeeze on Netflix acquiring streaming content out of the cable ecosystem. That Netflix didn’t understand these near-term content acquisition dynamics and therefore feel the need to keep DVDs well-integrated with streaming is an epic failure of strategic thinking.
Beyond the churn in the existing subscriber base that the price change and now the Qwikster introduction will bring, the other big issue is how they will affect new streaming subscriber acquisitions. As I pointed out last week, a thin streaming content offering will make it tougher for Netflix to acquire streaming subscribers at the same rate it has. That in turn could cause a material hiccup in Netflix’s financials that could frighten away prospective content partners concerned about Netflix’s ongoing viability, especially as the company shoulders huge payments for licensed content from Epix, Relativity and other current partners. A serious downward spiral could ensue.
Long-time Netflix skeptics are no doubt feeling some sense of vindication these days. But the reality is that Netflix’s current woes have less to do with external forces than with its own executive decision-making. Netflix increasingly looks like a company that has completely lost its focus and is lurching from one ill-considered decision to the next.
by Will Richmond