[October 10 Update: “Netflix “has abandoned its unpopular plan to spin off its DVD-by-mail service and rename it Qwikster, saying it will continue to offer both services through its flagship web site.” From Netflix: “It is clear that for many of our members two websites would make things more difficult, so we are going to keep Netflix as one place to go for streaming and DVDs. This means no change: one website, one account, one password… in other words, no Qwikster.” Obviously this news renders moot much of my previous discussion, preserved below. -Ari]
As I indicated yesterday, I’m a little shocked by all the people sliming Netflix for the “crime” of offering customers amazing services for stunningly low prices.
No, the company did not handle the price hike well (though its real error was offering unrealistically low prices in the first place). And I do recognize that splitting the DVD rental from the online streaming (with two web portals and two bills) adds a minor inconvenience to customers using both services.
But many treat Netflix like its leaders had absolutely no reason for splitting the business other than to annoy customers. In other words, people utterly ignorant of the business’s internal forecasts and long-range strategic plans think they can armchair-CEO better than those whose livelihoods and futures rest on the success of the company. I think that attitude is more than a little presumptuous.
Now, I don’t know those forecasts or plans, either; however, I can take some educated guesses as to why Netflix decided to split the business.
1. The inconvenience is minor. Is it really that hard to maintain two accounts? No. It’s extremely easy to log into two pages and maintain two queues. Until recently I used both of Netflix’s services, and that required maintaining two lists, anyway. If something in my DVD queue appeared in streaming, I still had to manually rank the item in my streaming list and remove it from my DVD list. So the new system is trivially different. (That said, Netflix would do well to alert customers when DVD items become available for streaming.) [Update: Somebody pointed out to me that it was possible to maintain an integrated queue on the Netflix DVD list, as everything streaming is also on DVD, but I never found that helpful.] And two lines on one’s credit card bill instead of one? Like, Oh, My, God, surely the sky falling comes next. Get a grip, people.
2. Most people will naturally gravitate to one service or the other. As I reviewed yesterday, I dropped the DVD rentals after Netflix announced the price hike. According to Henry Blodget, half of Netflix’s customers used both services. (For those keeping track, that means half used only one service or the other.) But the figure for both services was inflated by the ridiculously and unsustainably low bundling price. If you wanted the DVD service, you could get streaming on the side for a pittance more, and vice versa.
Those running Netflix, not being as dense and short-sighted as so many of their critics have managed to appear, can see the technological trend lines. Streaming is getting progressively faster and cheaper. More and more people are buying iPads and other portable devices that can handle streaming. Ever more content is becoming available for streaming. At the same time, some people just prefer the older technology, can’t get good internet connections, or don’t want to tie up their internet with streaming. Thus, the two groups of customers seem to be diverging, not merging.
3. The split allows more tailored marketing. Assuming the above to be true, that the DVD and streaming customers represent very different demographics, a split company may have a much easier time tailoring its marketing campaigns to the two distinct groups.
4. Splitting the business allows easier adjustments to both sides. Not a single critic of Netflix can predict what’s going to happen to the Post Office over the coming months and years. Perhaps Netflix’s critics have failed to notice this little detail, but the USPS delivers Netflix disks. The USPS has been hemorrhaging billions of dollars, so delivery schedules or prices may change dramatically over the coming months. Netflix may have to change its DVD rental service accordingly. At the same time, while streaming becomes faster and cheaper, it could be that hot new content may cost Netflix more to secure. Splitting the business allows each side to easily and independently adjust pricing and details of service.
5. Splitting the services allows for splitting the company. Others have suggested this. With the services split within Netflix, the company could easy split legally as well, forming two autonomous corporations. Or Netflix could eventually sell off the DVD side. I can’t imagine that the people running Netflix have never contemplated such possibilities.
Netflix can clearly see the model of what happens to companies that fail to adapt to changing technology: Borders. Netflix has chosen to take its lumps in the market now in the hopes of sustaining its long-term health. While sensible observers can debate whether Netflix made the best long-range decision, I think it’s foolish and frankly mean-spirited to fail to recognize the plausible reasons supporing the company’s shift.