Netflix: Disrupting Itself?

Tuesday, September 20, 2011

Farhad Manjoo of Slate looks at the recent, bizarre-sounding decision by Netflix to make its DVD rental and online streaming services into separate businesses. He starts off by ticking off the many reasons the move looks so boneheaded -- and then manages to make a decent case for why it may be a good move after all.

The key advantage of Netflix's new model is that it will give each side of the business -- the DVD side and the streaming side -- flexibility to manage its service in a way that pleases its own customers. As a combined service, any move to strengthen one side of the company over the other would have been perceived negatively by one group of customers. Netflix believes that its DVD shipments will peak in 2013; after that, as fewer and fewer people subscribe to DVDs, it's going to have to raise prices to support the physical infrastructure needed to ship out the discs. Now it will be [Netflix DVD spin-off] Qwikster that will suffer the negative reaction to all future price hikes -- and Netflix that will benefit from the customers getting rid of their DVD plans.

This plan is also straight out of The Innovator's Dilemma: "With few exceptions," [author Clayton] Christensen writes, "the only instances in which mainstream firms have successfully established a timely position in a disruptive technology were those in which the firms' managers set up an autonomous organization charged with building a new and independent business around the disruptive technology." Christensen argues that setting up a separate organization allows the disruptive side to ignore customers who like the mainstream side. "There are times at which it is right not to listen to customers," he writes. [link for "disruptive technology" added, format edits]
In essence, Manjoo argues that Netflix founder Reed Hastings sees the writing on the wall for DVD rentals and wants to get out while the getting's good -- but continue making money on them in the meantime. This will be inconvenient for those of us who want to use both formats, but I bet many people will pick one or the other. Hastings will get lots of people off the fence that way, have a lock on the streaming subscribers, and have name recognition with the DVD subscribers when that method of home entertainment finally shrivels up.

-- CAV


Rational Education said...

Reed Hastings is busy adjusting his company to the fascist future he sees under Obama, with government contracts. Why bother with customers and value offers when he can wiggle his company's way with the government guns and enslave taxpayers?! The BS of "Digital Promise"...let's call it by its proper name: fascist takeover.


Realist Theorist said...

I'm sure it takes a lot for Netflix to run as well as it does. However, as businesses of that size go, it is far from a behemoth. It is actually a pretty simple business.

If Amazon were to spin off Kindle book, and online movie streaming into a separate company, it would not make sense to me, but at least it would have the excuse that its product-line was getting too unwieldy.

It would not have been difficult to create two entities, even with a new brand and have these two entities share just a few minor things:
- user login credentials
- core movie catalog (just sharing information on whether a title is on the other service)
- user-movie ratings and reviews

As much as I admire Netflix's execution, I view this fiasco as a major negative. As a customer of both services, I'm not leaving in a huff, but I've already started checking out the competition.

From the Netflix blog about the incident it seems to me that Hastings does not really understand his customer, and has a stock-market focus. That's not a recipe for longer-term success.

Gus Van Horn said...


I'm not a WSJ subscriber, but since the article starts off discussing wasting enormous amounts of computational power in classrooms, I wouldn't be surprised if something stupid is going on.


I agree: The execution is horrendous, including the two entities not sharing the "few minor things" you mention.

Indeed, Manjoo is the only person I've seen to argue that Netflix isn't being completely stupid -- although I haven't exactly been scouring the Web for such an argument.