Netflix: Disrupting Itself?

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