Services|September 21, 2011| Author: Steven Hodson|Tags: , , ,

Netflix makes a smart move and nobody gets it

Here is a simple fact of life – people are selfish and don’t like change.

Here’s another simple fact – tech pundits live in a rarefied world that leads them to believe that everyone one in the world sees and uses technology just as they do.

When it comes to the first simple fact let me be clear, I can be just as selfish as the next person and even though I love technology there are times when I hate change as much as the next person; unless of course they are in a lineup for yet another Apple product refresh.

Oh, and by selfish I mean we want things to be the best available for the cheapest price possible; preferably for free.

How does this relate to Netflix?

Well as I pointed out in a previous post here at Medacity about how all you Netflix whiners need to STHU and as expected the whining; and the we know better than you Netflix pontification has continued.

To be fair to some of those pontificators Netflix has screwed up. There is no denying that; however the whole name and dual site thing aside the prevailing opinion of Netflix splitting off its DVD business is that it was a stupid move on the company’s part.

Much of what has been written gives the impression that Reed Hastings woke up one morning last week, walked into the office saying he has a great idea and in a perfect Captain Picard voice said “Make it so”. As Reed Hastings said himself in a blog post following the “communication” disaster.

For the past five years, my 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 or Borders bookstores – do not become great at new things people want (streaming for us) because they are afraid to hurt their initial business. Eventually these companies realize their error of not focusing enough on the new thing, and then the company fights desperately and hopelessly to recover. Companies rarely die from moving too fast, and they frequently die from moving too slowly.

So let me get this straight. A company with $2.6 billion in 2010 decides on the spur of the moment; following some bad press in the tech blogosphere and a smack on the wrist by Wall Street, to one day be a whole company and the next split itself into two companies. Get real. As badly carried out as the announcement might have been; and the whole naming mess around Qwikster, this didn’t happen over night.

I am betting this move, in the boardroom at least, has been in the works since Hastings said that Netflix is now a streaming company at the 2010 Q3 earnings call. It is a move that I think Hastings saw coming for some time; which makes the final announcement; and naming, that much harder to accept; but that doesn’t change the fact that this was a move that Netflix had to make at some point.

As of 2010 it was costing Netflix approximately $500 million per year to ship out those DVD’s that for the most part ended up on a coffee table, forgotten about. That is $500 million out of Netflix’s bottom line for a revenue stream that will at some point dry up. Then there is the whole infrastructure needed to support those mailings, an infrastructure dependent on the US postal system, a system that is on the verge of bankruptcy and about to undergo some radial changes which would undoubtedly affect Netflix.

Plus, as Mark Suster pointed out in a post at Fast Company, the costs of the DVD end of the business isn’t going to go down; as they possibly could with the streaming business, which means at some point there are going to be price increases for those DVD subscriptions. It won’t happen tomorrow but you can be damn sure they will see increases so why have to go through the recent uproar that Netflix went through when they announced the subscription split and price changes if they don’t have to.

Sure plenty of tech pundits have been quick to point out that the quantity of streaming content isn’t the greatest pointing the recent pull out of Starz (whose content is questionable at best) as a prime example. The problem is that these pundits are pointing their fingers at the wrong company.

Do you really think that Netflix doesn’t want to be the premier supplier of streaming content? Just as their announced deal today with Discovery shows, Netflix is willing to work with any media content producers, The key word being work which is something that old media networks and content companies don’t want to do unless they come away with incredibly restrictive terms and lots of money.

The other discussion point around all this is that Netflix spun off the DVD business in order to sell it off and/or make Netflix more attractive for acquisition. This is an argument that has some legs but one has to wonder who the buyers would be especially considering the hard time that Hulu has had in selling itself.

In both cases these companies are reliant on deals cut with content companies that are totally reluctant to even be doing business with streaming services like Netflix or Hulu, and Netflix spinning off its DVD business isn’t going to ease that tension in the slightest. In fact it could possibly make any future negotiations even more difficult because old media companies and content producers would be dealing with a company that now has laser focus on one specific part of its business – streaming video.

The biggest failing of Netflix and Reed Hastings through this whole episode is best phrased by Thomas Baekdal when he wrote

Netflix is the perfect example of a company doing the right things, for the right reasons …but in quite a disastrous way. They are trying to have the arrogance of Apple without the aura of Steve Jobs’ “stop fuzzing around, you know I’m right!”

Yes, there is no getting around it. Netflix messed up badly throughout this whole affair, and yes it will continue to haunt them for some time; but that doesn’t change the fact that this was a very smart move by the company. The only one’s who will end up looking dumb out of all this is the tech pundits who think they know more about running a multi-billion dollar company than the man who got it to this point, and hopefully beyond.

  • Anonymous

    Interesting thoughts, but I take issue with a couple things, mainly “Starz (whose content is questionable at best).” The Starz deal for Netflix includes a lot of Sony and Disney content, some of which came very close to its pay-TV release date.
    I don’t know who you read that said this deal was made overnight as a knee-jerk reaction, but stop reading them. The main thing we in the tech press object to is the separation of the services in terms of their Web sites, billing, and everything else. In the very near future, what you rate content on Netflix or Qwikster won’t influence what’s suggested by the other service, which is awful.
    Netflix is doing well for itself with TV show streams but the move is going to hurt it in the short term and doesn’t make anyone want to invest in it or to add a new Qwikster account.