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Why Netflix is a cautionary tale for newspapers

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When Netflix (s nflx) 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 (s aol) 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

30 Responses to “Why Netflix is a cautionary tale for newspapers”

  1. Mathew,

    I agree that newspapers and other publishers with legacy businesses will need to make the transition to digital somehow in order to survive. But as Jack and Ana point out, most will not, and it’s not because they seem to be waiting for their subscribers to die of natural causes. It is instead because they are waiting for their executives to do so.

    Unfortunately for those of us who are concerned for the future of the writing profession in general, and specifically for journalism, their inaction is disturbing. It is even more upsetting because there are good examples of successful digital publishing models that could be tailored not only to their existing subscriber base, but to a whole new reading audience.

    One example is how specialty publishers (screenplays, sheet music, blueprints, etc.) are using micro-licensing to distribute their content digitally without precluding its physical consumption. By uniquely licensing works directly to their readers, these publishers augment their “pay-per-download” / “pay-per-view” products with very targeted advertising, which is highly valued by their advertisers.

    It’s a technique that newspapers and magazines might consider as a better method of survival than paywalls.

  2. Streaming is of course the future of video and Netflix does need to focus squarely on that shift. I have some trouble with how they have implemented the change so far mainly b/c the DVD’s I rely on for most of my favorite content increasingly arrived damaged/unplayable, say in the last year or so. That aside, whether Netflix they can make the shift to digital successfully is another question. Netflix became successful by building high-performing infrastructure for getting physical DVD’s to subscribers. In terms of licensing, content producers were aligned w/Netflix b/c it was the best option at the time for getting their physical content consumed. But the shift to digital effectively kills the license negotiating leverage Netflix had around physical distribution. The playing field shifts largely from distribution to content licensing. Content producers are in the drivers seat now and Netflix shows no extraordinary skill at digital licensing based on their catalog to date. Furthermore, Netflix is now in competition with companies with equal or greater skill at building digital distribution networks (e.g. Amazon, Apple, Hulu, etc.). Like newspapers, Netflix has enjoyed dominant brandshare in it’s market, but may just lose it all by investing too little too late as stronger and/or more agile competitors move ahead aggressively.

  3. Glenn Allen

    Actually, I thought the “price increase” was long overdue. DVD subs had been getting a free ride on the streaming for a long time. There is little if any crossover between the operational costs for DVD vs. streaming. The “apology” was quite unnecessary. The split of “Qwikster” from Netflix, however, borders (pun intended) on ridiculous–and not merely for the name; it adds a level of difficulty for people simply trying to find a movie or show to watch. For those who actually want both DVD and streaming, it’s kind of an insult to their “intelligence” to treat it as two separate entities. Netflix seems to have gone off the rails. (And, sorry, but except for the whole physical vs. digital thing, it really doesn’t apply to newspapers at all.)

  4. Charlie Beckett

    Your faith in big leaps into the dark is not supported by the facts in the film market, let alone newspapers. I do less film streaming because it simply does not work as quickly or consistently as a DVD – and I live in the centre of a city with superfast broadband.
    The problem for newspapers is that even if they move to digital they don’t get anything like the same revenue as paper editions did. This may be an historical shift that they can’t do much about.

  5. Now I know why the articles I click on never land me to this site.

    The problems the newspaper industry is having right now are totally different than what’s going on with Netflix. A better analogy would be like Apple cutting the optical drive out of it’s computers which forced everyone forward on switching away from that. Yes, a painful transition for some, but ultimately the smart move.

    The main reason why customers are mad is because, as someone else already mentioned, Netflix has done an awful job communicating the reason they need to do this: Bring more content to streaming. It’s just that simple. The general public doesn’t understand this concept, so they all got their panties in a wad. Period.

    Newspapers suffer from a concept just as simple but vastly different: They think their content is worth more than it actually is.

  6. Barry Styles

    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.

  7. 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!

  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.

    • Eric Peterson

      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

  9. 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.

    • 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…

      • Ana Cantu


        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.

  10. Hunter Robbins

    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

  11. 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.

  12. Rob Tyrie

    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.

  13. “…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.

      • 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.

      • 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.

      • 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.

    • Taylor Trask

      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.