Monday, October 10, 2011

I spoke too soon: Netflix

Seems like Reed has decided to take back his decision to split Netflix into a video streaming business (the future) and a DVD by mail business (the legacy).

I wonder why he changed his mind. I thought the decision to split the company was excellent.


Blogger hbl said...

I assume he changed his mind because of customer demand.

The only explanation for the split that seemed credible to me was the "sell netflix streaming to amazon" theory, which might maximize current shareholder value if netflix believes their dominance has peaked.

Netflix streaming is just a middleman service with a temporarily superior technology build-out... their continued dominance will rely on their content license negotiation effectiveness... not easy stuff.

They'll need other customer-facing differentiators to ward off competitors, and a unified DVD+streaming library/queuing/recommendation experience all under one site and customer login is MAJOR because the future simply isn't here yet.

11:28 AM  
Blogger winterspeak said...


did customer demand really have enough time to clearly materialize in the 10 days or so between the initial announcement and the back track?

your "sell netflix streaming to amazon" is credible, but so is the simple reality of organizational focus. i spoke with the ex-VP of Product at Netflix many moons ago, and he consistently spoke in terms of focus, and where things are on one's priority list. I'm sure he learned this from Reed, and that's the context I could make most sense of the decision from.

No MBA would suggest what Reed did -- it could only come from a place of deep operational realism.

Also, there's a chicken/egg problem with dominance and content license negotiation effectiveness.

1:01 PM  
Blogger hbl said...

I do think customer demand *might* respond quickly, between online forums and a rolling customer billing date that might have shown a new jump in cancellations.

I think your organizational focus point is a really good one. But someone has to be weighing all the factors -- can a split organization really improve its product significantly enough due to the split to outweigh the disadvantages that the split creates for customers? And if so, in how long a time frame? And in what ways might focus be comparably improved by adjusting internal organizational structures "invisibly" to customers?

It is odd that they would change plans after such a short time but something likely forced it... customer or content provider feedback, failed acquisition negotiations, or something. But I haven't followed this topic closely and could easily be off the mark.

2:28 PM  
Blogger RomeoStevens said...

I think he found some balls and promptly had them chopped off by panicky conservative and short sighted board members.

9:25 PM  
Anonymous Anonymous said...

I never thought the split made much sense to me.  I understand the rationale (higher content costs and a presumption that physical media is going away).

This also implies that having a "last-mile" channel to consumers physical locations has less importance than in the past.  I'm not so sure about that, it could very well be that having physical distribution of small objects could be a leveragable asset, objects other than DVDs.

Also, the manner in which it was communicated to consumers was fundamentaly flawed.  Price increases, even when justified, are difficult in this economy and need to be carefully thought through.  I don't think it would have been difficult to give consumers a heads-up and then later announcing some options for legacy consumers and a new plan for new customers.  The speed with which is came out smelled a bit desparate.

Splitting the legacy and online divisions into separate brands/companies was also a weird strategy

The only reason to split the divisions was to enable a spinoff of legacy, I assume to a competitor.  But then you lose some pricing power with the studios, as well as limit your online offering to whatever the studios want to put online.

And whoever buys the legacy business to is going to have an online offering.  So you risk making your competition stronger if your strategy turns out wrong, or even if your strategy's timing is off.

And no one buys the legacy business without a customer list and transaction history - that's the family jewels.

And the last mile distribution (with a first class return function) is an incredible asset that would have to be included in any sale of legacy.

And if you aren't going to sell off that business, why go to all the trouble of creating a new brand, etc.

Now let's say Reed is having a board battle, say they are reluctant to go get more capital, I could see his move as a "OK, then lets dismantle what we've built", a 2x4 to the head to show them they need to get serious with the studios and he needs more funds.  Losing 50% of market value should have gotten their attention.

9:40 AM  

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