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Summary:

Netflix has angered many of its users by raising its prices and splitting up its DVD-by-mail and streaming businesses. But co-founder Marc Randolph thinks the separation and re-branding of the DVD business as Qwikster is “one of the smartest, most disciplined and bravest moves [he's] ever seen.”

qwikster

Netflix has angered much of its user base and heavily disappointed investors over the last several months by raising its prices and splitting up its DVD-by-mail and streaming businesses, causing users to quit and leading to a freefall in its share price. But co-founder Marc Randolph wrote in a blog post Monday that he thinks the separation and re-branding the DVD business Qwikster is “one of the smartest, most disciplined and bravest moves [he's] ever seen.”

Randolph, who was Netflix’s founding CEO and served on the board of directors until his retirement in 2004, compared the decision to split up the company’s operations to early decisions made in Netflix’s history, before it had settled on its legacy subscription DVD-by-mail pricing model. In the days shortly after they founded Netflix, the company had all the makings of a traditional rental operation; it had due dates and late fees. More importantly, Netflix also sold DVDs, and those sales made up perhaps 95 percent of the company’s early revenues.

But the founders knew that DVD sales weren’t the future of the business, and made the difficult decision to turn away from those revenues in an effort to stay focused on the bigger, long-term opportunity. Randolph wrote:

[B]y 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 the short term, dropping DVD sales might have hurt its revenues, but Netflix benefited from the decision in other ways: According to Randolph, the sign-up flow improved, and conversion rates went up. The company was able to clarify its positioning, which meant customer acquisition costs went down. Engineering became more productive, and QA testing became easier. Ultimately, all of that led to more innovation and the development of what Netflix came to be known for: unlimited rentals and a no-due-dates-no-late-fees business model.

While getting rid of DVD sales lowered revenues and likely angered three-quarters of its user base who bought DVDs from the company at the time, it also had the effect of streamlining processes and improving the end product. “[H]ard 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,” Randolph wrote.

Now fast forward a decade to Netflix’s current re-positioning of its business, and you can see Reed Hastings taking on the same sort of hard decisions that the company faced early on. While Netflix has a more diverse revenue picture and DVD rentals don’t make up as large a percentage of revenue as DVD sales had during those early days, Netflix is dealing with a much larger user base — which means many more users to upset.

At the same time, Randolph sees the Qwikster decision as necessary to ensuring the long-term viability of the streaming business. By separating operations and giving it a different brand, the company was able to cut down on operational inefficiencies. Not just that, but Netflix can focus on where it believes its future lies — and that’s in the streaming business.

While acknowledging that Netflix handled PR around the whole situation poorly, Randolph ends with a tribute to current CEO Reed Hastings and the courage it must have taken to make the decision and go through with it:

[W]hat 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.

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  1. Seriously?? The right thing? The right thing is about doing what the customer wants not what you want customers be damned! You can run your company any way you like but don’t be surprised when you become the online Hollywood video.
    To make matters worse the F8 announcement with Facebook places an even more glaring spot light on the SNAFU. The social aspect of Netflix has been gone for sometime and here in the US (the largest customer base for Netflix) we can’t use the new Facebook integration. Couldn’t they have left the Netflix model intact for the time being? Even with that there is still more customer inconvenience and confusion. Dumb move.

    1. What if the customers want streaming for free? Are they supposed to give it to them?

      The reality is their streaming service was not priced appropriately. They had licensing deals that were not going to be renewed or replicated with the additional content they would need to grow the streaming business. They MUST charge more for streaming than they were charging, and just because people are unhappy about it doesn’t make it the wrong decision. If they kept their pricing model and the company went out of business, it wouldn’t do the customers any good.

      The big mistake NFLX made was explaining this change. They should have said that their customer base was breaking into two – DVD rentals and streaming, and that by splitting the service into two distinct services, people would be paying less for the service they would mostly use. If you are primarily a DVD renter, or mostly stream video, you just got a price cut.

      This was an unpopular decision, but it had to be done, and the sooner the better if NFLX wants to remain a player (or become the leader) in streaming video entertainment. I don’t know if that will happen, but if they didn’t do this, both sides of the business would have eventually crashed.

      1. No, KenG, it was a dumb decision by Netflix since their streaming catalog was a lot smaller than their DVD-by-mail catalog. Old subscribers felt screwed over. If they went only streaming, the catalog was severely amputated. If they went only DVD-by-mail, they were sent back into the Dark Ages of waiting a week or more to see new content.

        Netflix blew it. Plain and simple. That they’re still refusing to even acknowledge the real reason for their subscribers leaving in droves just shows they don’t really understand their subscribers.

        Netflix should have made this move after there was no difference between their steaming catalog and their DVD-by-mail catalog. Then there wouldn’t be any need for subscribers to subscribe to both and thus there would be no subscribers who felt screwed by this move to get the same content they had before.

        This move by Netflix will probably go down in the history of marketing along with the Edsel and New Coke.

    2. I couldn’t agree more!! Netflixs has a WEAK streaming catalog and is years away from making it a stand alone company. In fact I don’t think they will be able to until they actually buy some old movie rights, otherwise they will continuously be at the mercy of greedy Hollywood every year and they don’t have the cash for those fights. The barriers to entry in the streaming industry are not that high so they need some kind of cushion.

  2. KilltheCable Bill Monday, September 26, 2011

    Definitely a bold move and i definitely see his reasoning. “Never go to a rotating restaurant and expect good food. Why? Because they have a rotating restaurant.” Business savvy people know you only need to do one thing right and for Netflix it is video streaming. Now can they cont to do it better than the competition? time will tell…

    1. One thing, eh? What is GE’s one thing? Or is this just a silly B-school aphorism?

    2. KilltheCable Bill, but they’re not doing it right. They should have waited until their streaming catalog was the same as their DVD-by-mail catalog. Then people would feel a need to get both or feel screwed that they’d have to get both so they can get some content immediately (streaming) and what wasn’t available streaming, by mail.

      1. Problem is, Scott, that the streaming catalog will NEVER match the DVD catalog. If Netflix wants to add a DVD all it has to do is go down to the nearest Wal-mart and buy it and add it to the catalog. If it wants a streaming title, it’s gotta negotiate rights with the content owner.

    3. “Then people would feel a need to…” should have been “Then people would NOT feel a need to…”

    4. I thought their “one thing” was getting video to customers.

  3. I wonder if co-founder CEO dude has a few shares of Netflix stock he would like to see improve in value. Hence the turd polishing. Just sayin’…

  4. Kudos to Reed. Doing the right thing is not always the popular decision. Focus, Discipline and Execution is what business people always talk about, but few ever have the courage to do.

    1. Their decision wasn’t right. It isn’t popular because their streaming catalog is much smaller than their DVD-by-mail catalog. They should have waited until the two catalog were the same and THEN this would have been the right decision.

      1. You keep bringing up streaming catalog being smaller than their DVD catalog. Whats important is if they are offering streaming catalog at a better price than anyone else out there, which they currently are.

  5. What will be grossly ironic is that this move will undoubtedly help kill off their DVD business. Then Hastings will turn around and say, “See? The DVD business had no legs. We told you so.” And worst of all? The Valley media will fall for it hook, line and sinker.

    1. DVD-by-mail was already dying. Why would customers do that when you could rent DVDs from RedBox for only $1 immediately instead of waiting over a week for them to arrive by mail? They spun off the DVD-by-mail because it was a “dead man walking”. Their mistake was not doing it after both their streaming catalog and DVD-by-mail catalog were the same. If they had done that, no one would have complained, subscribers wouldn’t feel it was a big price hike to have access to the same content library, subscribers wouldn’t have left in droves, and they probably wouldn’t have offered the higher priced package of getting both since there would be no point in getting both as there is now to get most of the content immediately (streaming) and the rest by mail.

      Then their DVD-by-mail could die a graceful death like how typewriters died when the personal computer came along.

  6. Joe’s Bag of Donuts Tuesday, September 27, 2011

    The point that’s missing is that there isn’t enough content available online (right now) to justify charging extra for it. I get what they’re doing, but for example, I have 328 movies in my DVD queue at Netflix and only 29 are available for download. How can you charge anything for such a poorly represented capability? Charge for it when you have equal (or nearly equal) content.

  7. Clueless Marc Randolph should, well, take a clue from Amazon. Faced with stagnating book sales, Amazon spins off its book division? No they didn’t, did they? Instead they innovated by creating something new, the Kindle, obviously and it was a hit.

    Imagine how pissed off customers would be if every time they bought a hard copy versus a digital one.

  8. Qwikster is the dumbest move Netflix has ever made. The price increases were inevitable. Not being able to manage streaming and discs together within 1 company is a sign of poor incompetent management.

  9. Ryan Lawler, did I say the right move (getting their streaming library the same as their DVD-by-mail library before splitting them apart) would be easy? No. But that’s what they needed to do before doing this split. The huge fall-out is because the two libraries are not the same.

    Their DVD-by-mail business is a “dead man walking” since everyone knows streaming is the future so they could have screwed it over a bit to help out their streaming business. They could have “quietly” removed content from their DVD-by-mail catalog to more equalize the two libraries as well as not added new content to the DVD-by-mail catalog until the two libraries were the same. At the moment they’re viewed as the same, they could do the split and then the DVD-by-mail business could have waited a couple months then gone on a massive shopping spree to pump up its library to where it can/should be. And/or it could have brought back old content that it had quietly retired to make the two libraries look the same.

    However, the best solution would be Netflix executive working their asses off to get their streaming library to be the same as their DVD-by-mail library. I know, I know, that would have required them to work, but right now they’re working their asses off FAR more trying to save their business. For I cannot believe every single Netflix executive was so dumb that not ONE of them pointed out what would happen. My bet is when this objection was raised, some idiot (likely one with a “chief” at the start of their job title) said, “Blah! Our moron subscribers won’t notice.”

    It is all about perceptions, Ryan. Netflix blew it because its subscribers perceived they were being screwed. Pay for an amputated streaming library or suffer snail-mail delivery of the full library OR, worse of all, pay for both to get full library. It is that perception that has damaged them.

    Seriously, this will very likely go down as one of the biggest marketing blunders of all time. Marketing classes will soon start teaching about this after teaching about the Edsel and New Coke.

    1. The DVD/Blu-Ray business will be viable for a very long time. It will be very difficult and expensive for Netflix streaming to offer the same selection as their DVD service. They have to compete against Amazon, cable channels and syndication companies. Many of their competitors insist on signing exclusive deals that freeze out competitors. Time Warner got caught throttling Skype. ISPs such as Comcast and AT&T will start doing the same to Netflix. ISPs will be able to strike down the FCC’s forthcoming net neutrality rules.

      1. “A very long time” is a relative term as is “viable.” Same can and WAS said about VCR tapes, audio cassette tapes, and other content carriers. DVDs will suffer a quicker death than VCR tapes since streaming/downloading doesn’t require you to buy a new machine to get new content as was required when switching from VCR tape players to DVD players. To do streaming/downloading, you already have a personal computer, Xbox 360, PS3, and/or smartphone to do so. You also don’t need to go to retail store or wait on snail mail for the content carrier to arrive.

        And no one in the industry EVER thought that Blu-Ray was anything but a stop-gap between DVDs and streaming/downloading. Blu-Ray was and is for suckers who cannot see the writing on the wall and/or have money to blow.

        And there has yet to be a price war on online/download content. Hollywood will and IS fighting such but it is only a matter of time before it happens. And it will happen due to RedBox alone. RedBox is already beating them on price ($1 rentals). Hollywood has to understand that a higher price doesn’t necessarily mean more profits. Yes, it does mean a bigger profit margin but they lose out in volume.

        As for ISPs throttling back download speeds, as long as government doesn’t control the Internet (and the bastards are sure trying), competition will settle this issue. And then there is also better compression technology that is also in the pipeline that will enable more content to be sent in small packages.

        No, DVD technology is now “dead man walking” and Blu-Ray was still born from the start.

  10. Cesar Cervantes Tuesday, September 27, 2011

    Netflix’s big mistake was to give streaming for free at the beginning. Customers were being given too much for very little, and now that the company has realized that streaming is the future, and makes these necessary changes, the pampered customer feels screwed over. Streaming should have been offered as an option and perhaps given its own name, but not too different than the original name (e.g. Netflix Direct, or something like that). And because both services complement each other, they should have been offered together as a discounted bundle, for which the integration of queues, browsing, rating and recommendation systems was essential.
    Now that the damage is done, the best thing they can do is to:
    1. Rename the DVD service to something recognizable, such as Netflix by Mail.
    2. Offer both services together as a discounted bundle.
    3. Create one fully integrated website in which customers that only have Netflix by Mail can only view items available through that service, customers that only have streaming can only view that content, and customers who have both can view both and are able to manage their queues and receive recommendations of both services from the same website.
    4. The price change and separation was necessary, but it can be made more gradual for existing customers, and a discount for bundling of services should be offered.

  11. Pigs and chickens, pigs and chickens.

  12. Todd Harrington Tuesday, September 27, 2011

    I think it was the right thing for them to do. Painful maybe, but most users are either DVD or Streaming. As has been pointed out earlier price break for them. If you use both streaming and DVD as I do, what’s the big deal. You can still have both, you already have seperate queues. Is it really that hard to go between your Quikster account and your Netflix account? I chalk this up to humanities need to B&M and it’s fear of change.

    1. So you are saying you enjoy inefficiency? I pay a company for video entertainment. I choose what I want to see & they deliver(mail or stream) my product. See? Easy. Why would anyone choose to go two places for the same product? It’s not about fearing change, it’s about ease of use & value. I don’t mind paying extra for by-mail service. I mind wasting time double searching multiple sites owned by one company.

  13. Amazon.com still sells DVDs . . . and they stream a bunch of content to me for free, for rent, for purchase . . . and I can buy mp3s, and video games, and download them from the cloud . . . they have obviously failed to do one thing well, and instead are doing several things well . . . and now that Netflix has flaked, they’re mo go-to for movies. Amazon.com is too cowardly to commit brand Seppuku, and that is why I spend my money there.

    -danny

    1. Your example actually reinforces what Randolph is saying. I spend a lot of money on Amazon, but finding a video on Amazon is pretty confusing because anything you search brings back a result that can be a DVD, BluRay, on-demand rental, or Amazon Prime video, among other things, say books with same or similar title, related toys, other random crap that has nothing to do with what you are looking for, etc. Even in a dedicated video player some videos will be on-demand rentals and others will be free prime streams. Not an ideal solution in terms of usability. This is one of the reasons I stay away from their streaming solution, the other reason being the much smaller selection of titles that are available, compared to Netflix streaming.

  14. Best entrepreneur; are you serious? Here is a CEO that is running a company that was dominant in its field with a happy and loyal customers base and in two months he loses at least a million customers and that good will, great job. Wait he is a visionary, he wants to move the company to streaming, thats the future. Streaming maybe the future but Netflix streaming is just an ok experience, making it stand along just makes it more apparent how inadequate it is and opens the door for a competitor that provides a better product.
    Separating the DVD business and giving a new name with zero market recognition, another innovative move; Blockbuster is laughing all the way to the bank. Almost left for dead Reed Hastings single handedly has given them a new lease on life.
    I was a Netflix loyal subscriber since 2002 now I am not. I now subscribe to Blockbuster for my DVDs and I still use Netflix for streaming. Blockbuster is better than I thought, service in my area is as fast as Netflix, they do not have the 30day hold on new releases, and in the first week I received from them a movie I had being waiting for over a month at Netflix. I can live with Blockbuster, I would not had found out if not for Reed. As far as streaming, if any service comes along that offers an equal or better selection, I will be sure to check it out, because Netflix has made itself a commodity by the way they value their customers.

  15. @Rambo, it is all about perception. You pay for a service and then find out if you go with the quick version of it (streaming), you lose a lot of the content you formerly had access to. You then find out that to get full access to all of the content while still getting most of it quick, you have to pay double to get non-quick part of the library by snail mail. See the problem there? Now do you understand why subscribers got upset?

  16. I can see it both ways, but after being a subscriber for a long time now, they lost my business. The rate increase was bad enough, but I used both services and one or the other isn’t sufficient enough to remain paying monthly for it.

    Here’s my scenario ….
    STREAMING: The selection is very limited, but they do have a few things that are interesting and the kids shows were good. However, my ISP has a bandwidth cap of 5GB/day, then they throttle the speeds and Netflix easily used 5GB+ if watching a handful of videos back-to-back such as for the kids.
    The streaming did help fill in the gap while waiting between receiving movies, but it alone combined with my bandwidth restrictions just isn’t worth a separate monthly fee….

    DVDs:
    At the time I canceled my account (earlier this month), the 3 DVD’s was only available with streaming and jumped up to around $25/month, which is higher than Blockbuster’s 3 DVDs without streaming. The advantage of Blockbuster (at least for some) is that you can exchange them in a store, but there aren’t any around where I live, so no gain there. Netflix has always had very fast turnaround times on the DVDs (faster than Blockbuster). But the drastic price increase and change in services was the main reason I dropped them. The wait for DVDs alone makes it hard to justify the monthly fee, especially when RedBox has really made a dent in the market with $1/night rentals and instant turn-around times.

    For me, Netflix lost it’s appeal when they basically decided to drop their edge on the competition, which none of them had the combined services and that gave them 1-up on the rest. For people who like one service or the other, I suppose their service quality and selection are good enough to keep some around, but they really don’t have that extra “bonus” over the competition now and I’m interested to see the toll this plays on them in the long run.

    It gives the other competitors a chance to take the stage and Blockbuster could even make a comeback …. maybe.

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