In Defense of Netflix

What do you do if you run a highly successful company with two business lines; one extremely profitable but the other, not so much? Your customers still enjoy both products, but it’s increasingly difficult to advance the first if you have to keep pumping cash to sustain the second.

The obvious answer is, you get rid of the one that’s floundering and reinvest in the one that’s flourishing. Yes, there will be backlash from people who like the second, but you know that in the long term, it’s the right thing to do.

This is the exact situation confronting Netflix, a company that provides media through on-demand streaming services (boom) and DVDs through the mail (bust). Until recently. In a highly controversial decision, Netflix announced it is spinning off the DVD mail-in service to a completely different company called Qwikster. Netflix was qwikly reprimanded for the move, with critics disapproving of

  • A name that resembles other startups that died off, such as Friendster and Napster
  • A Twitter handle @qwikster that was already taken by someone who posts about taking a shower and getting stung by a bee
  • A name that can easily be misspelled, which hurts brand recognition
  • The second fee hike this year (only to the mail service, not to the streaming)

Could a savvy business man who brought the Blockbuster juggurnaut to its knees suddenly be so dim-witted to rebrand a business with a silly, childish name? Perhaps. Unless he was trying to kick Qwikster to the curb so he can focus on the other business line that he actually cares about.

Here’s my prediction: Qwikster will fail. Netflix will improve. To the point that people who love DVD by mail won’t care for it anymore because streaming will be sufficient.

Netflix’s biggest threat isn’t disgruntled users who huff and puff about fee hikes and inconvenient billing setups. Their biggest threat is competitors in the content streaming market. Big competitors with deep pockets and clear advantages.

  • Hulu Plus offers TV shows a day after they air
  • Amazon Instant is bundled with Amazon Prime
  • Apple iTunes has its own software platform and hardware devices
  • TimeWarner gets movies the same day as DVD releases
  • Android Market is backed by internet giant Google
  • Vudu, a streaming media company is backed by retail giant Walmart

Netflix’s advantage is in brand recognition and an already large customer base. But if it doesn’t improve its deficiencies soon, one of these other giants will overtake them with relative ease. They knew that if they had to keep sinking cash into a destructively expensive operation like mailing physical DVDs, where

  • the cost of postage keeps increasing,
  • the number of DVDs keep expanding, and
  • the overhead costs never diminish

they’ll be sunk faster than you can say Alta Vista. But now that they put all their eggs into one content streaming basket, the likelihood of success greatly increases, despite the short term criticism from upset customers.
So was it the right move to ditch the DVD mail-in service? Definitely.

Can government learn something from this move? Obviously, government can’t get rid of important services just because it’s antiquated and incredibly costly to maintain. Government could save a lot of money if they closed down brick and mortar field offices and mandate citizens to conduct business online, but they can’t.

However, has government done a careful analysis of the cost-effectiveness of their programs? Yes, we have many performance measures and benchmarks, but do they translate to useful metrics that help us better manage our programs? In many cases, yes, but in many cases, probably not. Government still sinks way too much money into outdated, costly behemoths and not enough into newer, more cost-effective technologies. It’s certainly easier to talk about efficiency and effectiveness than to actually do it, but there are steps government can do to better manage how it allocates resources. We might be scornfully criticized in the short term, but in the long term, it might be the right thing to do.

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Mary Yang

I think you make some great points here, Jon. With regard to the movement of technology from hardware to software (servers to cloud), DVDs as a tangible item does increase the costs of doing business for Netflix. Most definitely, their competitors are eyeing the streaming media/tv/movies business. It’s true that one is going to show up tomorrow and say they’re going to start a DVD-by-mail business.

I think the point that may not be quite right is that “streaming will be sufficient.” Mashable has an editorial that maybe says it better than I can:

Thanks for your thoughts and contribution to the debate! I love hearing other people’s ideas.

Jon Lee

Hi Mary, thanks for sharing the link. I’m not sure I agree completely with Mashable’s arguments.

1) I don’t think most people care about the depth of the DVD collection. Most people I know wouldn’t care for 90% of the offerings to begin with. Bragging about how extensive your library is is like saying someone is amazing on Twitter because he/she has 10,000 followers.

Although I wholeheartedly agree that the current streaming options on Netflix are abysmal. But part of my argument, which takes on some assumptions, is that if Netflix no longer needs to invest in DVDs, which was $61 million in the first 6 months of 2010, it can use those dollars to lock up new deals for streaming.

2) Mashable also noted that 12 million people opted for both streaming and DVD back in July to prove that people still want streaming. I’m not sure that’s entirely true. The cost rose $2. I kept my DVD service because I felt that $2 was not significant enough for me to discontinue a service that I didn’t really care for but would be nice to hold onto. But now that the price for both is going to double what it was before the first hike, that’s enough motivation for me to get the heck out. It’s all about what you’re willing to pay.

But then, I’m not the average media consumer, so I’m a bad example. I rarely watch any TV or Netflix. It’s mainly for my kids, and there are plenty of quality offerings for them to enjoy.

Andrew Krzmarzick

Alright – so I quit Netflix today over the 67% rate hike from $9.99 to $15.98. I have been using them in tandem with Roku for Internet-based TV. We canceled cable and the Netflix pairing was one of the best features….though their selection of videos was incredibly limiting.

To your main point, we’re likely going with Amazon for now…until another one of those vendors decides to partner up with Roku. Where are you leaning, Jon?

Jon Lee

That sounds a lot like my house, Andrew. I have an Apple TV instead because I thought since it also runs on iOS, a lot of innovating features will be coming out soon. Doesn’t seem to be the case, unless you want to jailbreak your Apple TV. If I could get Amazon instant on my Apple TV, then I’m definitely going to Amazon because of Prime.

Ed Albetski

One of the biggest fatal mistakes all companies make is assuming that current business conditions are a constant. Right now streaming media is cheap, and Netflix takes advantage of this free (for them) medium thru which they deliver their product. Eventually ISP’s are going to crack down on companies providing paid services using their bandwith. If they can find a way to charge them for it, they will.

I’m working on finding a way to charge callers I don’t know a $5 fee for having me speak to them. Once I figure this out, I’ll work on the SPAM problem. I love being retired.

Jon Lee

Hi Ed & Mary, I’m no expert, but my guess is the ISPs won’t be able to figure out a way to charge extra in a way that the federal government will approve.

Ed Albetski

@Jon, not to be too cynical, but I’m sure if the ISP’s contribute to enough campaigns, and the new funds are subject to taxes, something will be approved. Every bird has to wet it’s beak, Uncle Sam included. You know, everytime I put real world situations into the framework of a Sopranos episode, everything becomes crystal clear. It’s like using money to illustrate math to kids; suddenly they understand… 🙂