Blog Post

Netflix’s Split Misses The Trick

Netflix (NSDQ: NFLX) splitting itself in two for two different media is the wrong strategy at the wrong time.

Yes, DVD and online movie rental businesses are quite different. But therein lays the opportunity

Connected-TV consumption is about to explode. Customers who currently get Netflix DVDs by post are now buying internet-enabled TVs with built-in Netflix.

The challenge for Netflix is to migrate one to the other – a transition that is already happening naturally but which Netflix should be helping. But, by separating each, Netflix makes it harder to ensure the old side of the business can help the new one grow.

The coming decline in Netflix’s DVD business is both its biggest threat – and its greatest opportunity. CEO Reed Hastings should be regarding his DVD customers as the most fortuitous pool of potential digital adopters that could ever have fallen on his lap – a readymade market of entertainment fans all set to make the switch. A smart move would have been to actively induce DVD renters to start watching online over the next few years.

Instead, with its Chinese wall, Netflix has diluted its brand, leaving it with a plastic-disc business it knows will decline all by itself, and an online business which it now has to grow in isolation.

Now, it’s not whether customers of the Netflix brand will transition from DVD to online, it’s whether Qwikster customers will switch to a different provider on a different device.

When you isolate the online Netflix from the plastic Qwikster, Netflix looks a lot less appealing – its online catalogue is about a tenth the size of its DVD roster, because online subscription rights are harder to come by.

Maintaining a holistic, cross-media business would at least have allowed to easily obtain their chosen content, whatever the format.

7 Responses to “Netflix’s Split Misses The Trick”

  1. Their bigger issue in all of this was simply that they didn’t come clean with people. If they had to split because of licensing issues, then simply tell customers that. Then people would be angry at the Studios and not at Netflix. Also they could have separated the two services internally and legally, but maintained an integrated website and brand so that people who did have both services could cross-search…

  2. This decision is the beginning of the end for netflix.  Their core advantage as a streaming service was the fact that they don’t suffer nearly as much from not having a large streaming library.  If a movie isn’t available, no problem, just add it to your dvd queue.  Without that, the limitations on the library are going to drive away a customer base used to finding almost everything they look for.  They may get better at mailing dvds and better at streaming as his post suggests, but that will be overshadowed by the fact that they will get worse at providing a service to their customers.  Deliberately making your service less useful is rarely a smart business practice.
    As a response to customers being upset by price changes it’s even more insane.  I’ve been a netflix subscriber for 7 years, and I wasn’t bothered by the price change because I understand sometimes the price has to go up when you’re pioneering a new industry and can’t get content providers to give you the same deals the second time around.  But now, they’re telling me I can’t get the integrated service at any price.  I’m sure I won’t be the only loyal customer leaving over this one.  

  3. I was using both services, DVD and streaming. Now, if they had a better streaming selection, I would have let go of the DVD service. But since their selection is not good and they were going to raise my price unreasonably, I simply left. There are other ways to watch movies. Now Netflix has not only lost a customer, but my goodwill as well. Should they even offer me to go back to what I had, I would not do it now. I don’t like them or trust them now, and I will steer others away from them. I’m glad to see that about a million other former customers did the same. You can’t take things away from people and expect them to be happy with what you offer.

  4. Clare Cooke

    Seems illogical and counter-intuitive. Why waste the opportunity to migrate customers to digital in a seemless, single brand environment, especially given the upset already caused by splitting packages and hiking subscription fee. Surely the logical solution would be to reinforce the Netflix brand by incentivising physical customers to sample streamed product and hence move across to digital-only services over time without fragmenting brand.

  5. I was convinced by Bill Gurley’s argument that the split was necessary because Hollywood would be requiring Netflix to pay, for streaming rights, a fixed fee per registered member per month (as per cable deals). It seems plausible that the studios were reluctant to let Netflix off the hook for the 2m to 3m members that were DVD only, about 10% of membership.  The solution was, therefore, to move those customers into another business.  Netflix will still have the opportunity to migrate customers from one business to the other.