On Saturday, September 17, I wrote about my thoughts on Netflix’s recent price hike. Just hours afterwards, Netflix’s CEO, Reed Hastings, released a new bombshell through his blog informing the public that Netflix will be moving forward with a virtual (for now, at least) spin-off of its DVD business into a separate brand. I thought it would be wise on my behalf to drop a few lines on my perspective since this new move by Netflix seems to fit well with some of the things I was saying in my previous post.
In essence, I think the move to separate the DVD business even more formally than just through pricing makes a lot of business sense. Here are some quick reasons:
- The company can communicate clearer messages in its advertising and other marketing materials. Netflix will focus only on advertising the coolness and convenience of watching movies wherever you are, whenever you want, just by clicking a button on your Netflix-enabled device or hitting “Watch Now” on your computer/iPad/smartphone. The newly formed division, Qwikster, will focus on advertising the benefits of having a physical DVD – targeting an arguably different demographic segment.
- The company will align its P&L even better. Qwikster will have higher costs but will be positioned as the more mature business (whose sunset can be seen down the horizon in a few years). The expectations from this business are going to be different than the expectations from a high-growth business, such as the Netflix streaming division. In addition, Qwikster will be able to “milk” the high-paying customers even better – through add-on fees for Blu-ray movies and video games. It would be much more complicated for the company and confusing for the customer to try to add the extra fees onto a hybrid (DVD and streaming) plan.
- The company will have a better chance at building its negotiation case when talking to studios to renew or sign new streaming licenses. Now it will be clearer to project how many customers are indeed the “streaming customers” and should be included in calculations of the licensing fees. The DVD-only customers will be easily excluded from the calculation.
- The company could finally add the “video gaming” feature. With a hybrid model (both DVDs and streaming), it would be confusing to say the least to offer video games rentals but only on DVD. There would have been pressure to add the “video gaming” option to both streaming and DVD, which would all of a sudden position the company competing against both GameFly (for DVD) and OnLive (for streaming).
There are most likely many other reasons, I am sure. But, at least to me, the four reasons above are the main factors.
Now, many detractors have been whining that the split adds confusion and inconvenience. Well, I think the confusion existed before the split, as well. I would go to Netflix, browse for movies, select a movie – only to find out that it is available on DVD only. Then, I’d be disappointed because I really wanted to watch that movie tonight, and would start the search for a movie title all over again. Now, at least, I know that whatever I see on Netflix.com is available for instant watching. And if I really want to see a movie that is only available on DVD, I can go to Qwikster to look it up and order it in my queue. At least to me, that means a bit more order to the chaos. The inconvenience factor I’d simply be tempted to dismiss as a cliche that people throw out there because it has become so popular these days to talk about complete convenience (thanks to Apple, etc.)
Finally, a few words about the brand name chosen for the DVD business. Qwikster does not sound Web 2.0 at all. But wait a minute, is Qwikster really targeting the 2.0 demographic? I don’t think so! I wish I had the breakdown of DVD-only vs. streaming-only customers by age group and geography – but I am willing to bet that most of the DVD-only customers will fall in the 45+ age group and will not be located in “hipster” centers, such as San Francisco, LA, New York… And they are not going to be located internationally. So for them, a brand that sounds “like a MidWestern retail chain from the 1990s” may actually appeal better. Maybe not. Only time will tell.
Please let me know what your thoughts are. I am sure we can start a very nice discussion here.
Update: September 23 2011
Rick Newman posted a very insightful and forward-thinking piece on how Netflix’s actions are focused on the future, but customers need some time to grasp the premise of that future and catch up with it. Definitely, worth reading this post on Seeking Alpha’s site.
Update: September 26 2011