Why Netflix Decided To Cut Its Business In Half

Why Netflix Decided To Cut Its Business In Half

Since Netflix announced last night that it will soon spin off its DVD-shipping business as an independent company/website called Qwikster, Netflix fans and observers have mounted deafening protests on Facebook, Twitter, and elsewhere. Why on Earth would Netflix do this to them? Not only has the company raised prices on its streaming and rental services, but now it's making them more difficult to use together? Are the execs suicidal? In a way, yes, they are. But they're not as foolish as some critics may like to think.

What people should not lose sight of, and what is written implicitly but not explicitly in almost all of Netflix's words and actions lately, is that the company is deliberately trying to make access to both streaming and physical movies more costly/difficult. It is not just splitting its businesses, in other words, it's splitting its customer bases.

Netflix believes that it's in its best interest to force consumers to choose either DVDs or Streaming, hoping and expecting all along that most will pick the latter and drop the former. There are two reasons for this:

1. DVD by mail is expensive and outmoded and no longer viewed as a growth business for the company. It is not lucrative for Netflix to continue offering it (at a discount) to customers who really only want to stream. Netflix believes that streaming is its future (Reed Hastings and others have said so many, many times) and is trying to get users to go all-in on the service in order to help it continue to grow and be self-sustaining as an independent business. If DVD by mail dies as the result of the split, that is an acceptable consequence (or "suicide"). That's why they're keeping the Netflix name on the streaming side. (What serious company in 2011 would gamble its future on a site called "Qwikster?")

2. Netflix has a big problem right now with movie studios/content providers. It is are happy to make its movies available on DVDs (the older, established business model), but much more reluctant to offer them up for streaming (the model Netflix and everyone else wants). If Netflix can get a large army of consumers who are only interested in streaming, it believes it will be easier to demonstrate the value and necessity of streaming to the movie studios. At that point, better movies/content will be achievable for Netflix—and that, of course, is a critical component to their future success.

So yes, for those of us who like using both streaming and DVDs, these changes really stink. There's no doubting it. But consumers should understand that it's not the result of an accident or lack of foresight on Netflix's part—it's the opposite. Whether they'll be able to stave off a subscriber exodus and the collapse of their stock price, meanwhile, remains to be seen.

Tags: netflix, streaming
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