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Summary:

What kinds of lessons can newspapers and other print publishers draw from the experience of Netflix, which has come under fire from users for trying to make the transition from its legacy DVD-rental business to online streaming? Here’s a hint: they’re not good.

When Netflix first announced earlier this year that it was changing its pricing plans for its legacy DVD-by-mail service as a way of promoting its digital streaming business, we wrote about how this was very similar to what newspapers have been trying to do — that is, moving people from the high-cost legacy side of the business (i.e., print) to the lower-cost digital side (i.e, streaming). So what kinds of lessons can we draw from the furor over Netflix’s pricing change and the impact it has been having on the company’s revenues? Here’s a hint: they’re not good.

As Ryan Lawler reported earlier today, Netflix CEO Reed Hastings has posted on the Netflix blog what amounts to an apology to all of the company’s customers, saying he “messed up” and that the response to the video-rental company’s changes made it obvious that users felt Netflix’s actions “lacked respect and humility.” Hastings blamed himself for the negative reactions to the moves, saying he had “slid into arrogance” and didn’t communicate with users enough about the reason for the changes.

So is Netflix rolling back the price hikes that were originally launched to push people toward streaming and balance the costs of DVD mailing? No. Instead, Hastings says the company is separating its two businesses to make the contrast between them even more obvious: The DVD rental-by-mail operation is being rebranded Qwikster (a name that drew almost universal negative reaction from the tech blogosphere after it was announced) and the streaming business will continue to be known as Netflix. Hastings described his reasoning:

[M]y greatest fear at Netflix has been that we wouldn’t make the leap from success in DVDs to success in streaming. Most companies that are great at something – like AOL dialup or Borders bookstores – do not become great at new things people want… because they are afraid to hurt their initial business. [Companies] rarely die from moving too fast, and they frequently die from moving too slowly.

DVD rental to streaming = Print to digital delivery

As I tried to describe when Netflix made its initial announcement about the pricing changes earlier this year, the transition that the company is trying to make — from high-cost legacy business to new digital-only service — is very similar to the transition that newspapers and other print publishers have been trying to engineer (with mixed success) for the past several years. Just as Netflix has, many newspapers have been cranking up the price they charge customers for the legacy product, hoping that no one will notice or that the changes will be too small to cause much of a fuss.

The problem for print publishers — one that Netflix arguably doesn’t share — is that their legacy business still produces the bulk of the revenue they pull in via advertising, and therefore, the incentive to de-emphasize or radically downsize that part of the business isn’t as obvious. Hence, the reason why you see so many publishers opting for paywalls, which bring in incremental revenue but are mostly intended to function like a line of sandbags, keeping existing print subscribers from deserting that business for the free web.

Netflix doesn’t have to worry about the impact of its shift on advertising revenue the way that newspapers do, which is probably why it has accelerated its move, while many print publishers are still waffling about what to do more than a decade after the rise of the consumer web. All Netflix has to worry about is the impact on its customers, which is why Hastings has become so apologetic. The effect of the changes on the company’s revenue — and the resulting decline in the company’s share price — are enough to make it obvious that people don’t like the change.

Hastings is right, however, that changing too slowly can be far worse than changing too quickly. Arguably, users will eventually become used to the new structure of the service, and DVD fans will be content to use Qwikster while streaming fans use Netflix. At least the company is trying to move in the direction that has the most potential for the future — while newspapers continue to dither and hope that paywalls or all-in-one subscription services like Ongo will somehow fill the gap.

Who will be the first to spin off a newspaper?

The big problem for print publishers is that virtually none of them are going to be able to make the kind of shift that Netflix has just made: that is, renaming and effectively spinning off their existing legacy business as a separate entity — something that may even be a precursor to a sale of that business — while focusing on the fast-growing digital side. Only a few newspapers have been able to take as radical a step (including the Christian Science Monitor, which shut down its print product and went digital-only in 2008).

One media industry observer summed up the likelihood of any major newspaper making a Netflix-style move with a tweet:

Unfortunately for newspapers and other publishers with legacy businesses, they have to make the transition somehow, and the glacial pace that most of the industry has taken — which amounts to waiting for existing print subscribers to die of natural causes and thereby solve the problem — isn’t really cutting it. They can change quickly and risk the kind of customer uproar that Netflix is experiencing, or they can move slowly and be disrupted. At least Netflix is trying to disrupt itself instead of waiting for someone else to do it.

Post and thumbnail photos courtesy of Flickr users David Daniels and Shironeko Euro

  1. “…DVD fans will be content to use Qwikster while streaming fans use Netflix”

    Pleeeease, do you really think there are “fans” for the different services???? Qwikster will survive only because Netflix has yet to obtain streaming rights at the right price for that content.

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    1. That’s a fair point, Shamus — although there are people who tell me they prefer the DVD option. Why I don’t really know :-)

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      1. It’s not a question of prefering a technology. There is so much more content available via DVD.

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      2. I’m with you on this Matt. I prefer streaming and it really is only a matter of time before everything is available via streaming. Just look at the music industry. Virtually everything is now available via streaming. Netlfix has the vision for the future of the market. Streaming everything is the future.

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      3. Because they don’t have broadband and can’t get it in their area. Because they have it, but there are bandwidth caps. Because they want to see the DVD extras. Because they want to bring it to somewhere else to watch it. Because they want HD / higher quality than currently available via streaming. Because the content isn’t available via streaming (many of the shows I want to see do not currently have a streaming option on Netflix).
        I can probably come up with more reasons that for right now, people would prefer DVDs.

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      4. Seriously? You REALLY don’t know why people prefer the DVD option? I pay $8/month for the largest selection of DVDs on the planet, and another $8/month so my kids can have SpongeBob on demand. With apologies to my kids, if I have to choose, bye-bye streaming.

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    2. I wish Reed’s email would have eluded more to this very thing. The price increases were largely to help wage the war for rights acquisitions that will make or break the streaming business. If users knew that 3-5 additional dollars a month would lead to greater choice in streaming movies, the groaning could have been reduced even more.

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  2. Some good points Matt. But, Netflix in not a newspaper. Nor is it an advertiser.So to look to them as inspiration for the news biz is a tough one. The leading edge for news and ads, to me, looks more like Google, and Twitter or maybe Craigslist, Zite and Flipbook… I think the models exist to make money. Until newspapers have new tech and transaction leadership they will lose. Maybe the Post and New York Time should just sell themselves to Google and go into Beta :). Seems like the folks over at CNN figured a piece of this out in the Zite acquisition.

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    1. I agree, Rob — Netflix is not going to provide much inspiration on how newspapers should move forward. But I think (or hope) that it might convince them that they need to move forward with something more than paywalls.

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      1. Netflix IS a paywall.

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  3. Speak up with your wallet and put your account on hold for 3 months, during which time you will not be billed for the service. This will send a crystal clear message that users are not happy, but willing to continue the service if they do the right thing.

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  4. Yes, Netflix is dividing into two different companies; Netflix for streaming and Qwikster for DVD by mail. Customers will need to use two different websites to sees if a film/show is available on streaming or DVD.

    JUST ANNOUNCED: The parent company’s name for Netflix and Qwikster will be called Lame-as-phuckster.com

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  5. This is like saying the print version of the newspapers will continue to have all the top articles while the online versions will carry the week old news and lesser read content.

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  6. Interesting piece. It would be like if Netflix made up the majority of its revenue from the advertising on the DVD mailer. From there, making a transition to streaming only is an impossible choice.

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    1. Follow-up thought: Netflix doesn’t necessarily provide insight to publishers, but it may speak to journalists. The Netflix change is about staying competitive. The two facets of the company can’t stay afloat forever when they are chained together, but they could each swim on their own. A next generation streaming service would have a huge advantage over one burdened by legacy operations, much as Netflix did over brick and mortar. Much in the same way, I think the next generation of journalists will show the way forward: lean, online and unshackled by legacy publishing. Time will tell…

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      1. Jack,

        You’re right about Netflix’s problems speaking more to journalists than publishers. I used to be in newspaper journalism (though I now work for Dell), and progress happened at the speed of continental drift. I once walked into a meeting about how to improve my section’s homepage with a list of a dozen things we could do to increase readership and engage the ones we already had via social media. Half of the people in that room had no idea what I was saying (“Twitter? What’s that?”), and the other half liked it but said they needed to check with other people to see if it was feasible. Needless to say, nothing got done. And there are plenty of journalists in newsrooms all over the U.S. with ideas that they haven’t been allowed to try. Part of the reason is a failure of leadership; the other part is just not having enough bodies to do the volume of work it takes to both print a newspaper and keep a website updated.

        The main issue for journalism is generating enough money to do the reporting. I see the next generation of journalists concentrating on niche news sites because it makes more financial sense — you don’t have to spread your resources so thin and you can sell more targeted advertising.

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  7. Mathew, when the Christian Science Monitor shut down its print product and went digital-only, was that a successful move? If yes, why can’t other newspapers do the same?

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    1. It seems to have been pretty successful, as far as I can tell. One reason the CSM could get away with such a move is that it is owned by a charitable trust.

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    2. 1. Unique content (not picked up as AP or “in a copyrighted story the WSJ said…”)
      2. No need to monetize immediately (see Mathew Ingram’s comment below)
      3. Proportionally, costs of production/distribution for print version CSM made the decision that much easier

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  8. If Netflix was a content generator like the newspapers, or derived its revenue from the advertising on its DVD sleeves, it would make the business model analogous. Not the case.

    The price differential could have been done in a very different way by “incentivizing” the streaming part and measuring its response. Content wise, they are nowhere close. Crap-you-can-see-now vs. watchable-a-day-later will always be a split decision for most people.

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  9. The thing I don’t like about their business model is that I pay the same for either service. The DVD service gets movies as much as 6 months or more ahead of streaming. I like the streaming service, but why should I pay the SAME amount if I can’t get the SAME movies at the SAME time? If I have to wait 4 or more months after a movie is out on DVD, the streaming service should be CHEAPER!

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  10. As a very frequent user of Netflix streaming, I think if they are going to be promoting the streaming side more, they are really going to need to address content. As it stands now, in my estimation, content consists of about 70% low-grade B-movies and foreign garbage, about 25% cartoons, anime, and kiddie crap, and about 5% high quality movies (none of this includes TV-originated content). I would like to see an increase in TV series on Netflix simply because I do not watch network TV because of all the interruptive pop-ups and crap they leave on-screen.

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    1. So the irony here, is that the move Netflix is making actually works towards getting you better streaming content. They are actually handicapped by having both services together.

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