Qwikflix? Netster? Whence the split Netflix business?

Like most people – well, at least those who really get how startups and disruption work – I am impressed by Reed Hastings (Netflix CEO) willingness to take brutally painful short-term steps for the long-term benefit and viability of his company. He mentions several times in his posting that he worried about one issue more than any other over the last five years: will Netflix be able to make a successful transition from DVD-by-mail to streaming-over-Internet, or will it be too worried about cannibalizing its short-term cash-cow DVD business to successfully launch and grow its streaming business?

Clearly, Reed believes that splitting the business into two will give the freedom of maneouvre to the streaming business that it needs to grow and succeed. I respect and understand that. I also find it notable that the streaming business is keeping the Netflix name, while the DVD business is getting a new Qwikster name (which sounds suspiciously like the old Napster). But I have some key concerns about this structure:

  1. A split like this makes a lot of sense when both businesses have a viable future, but each needs to grow without encumbering the other. Yet, it seems pretty clear that the DVD-by-mail business is going to die a slow death. Essentially, the executives and team left in Qwikster will have options that, over the long-term, will be worthless or nearly so. Further, the message to investors (and potential employees) is, “this is the dying business.”
  2. A split like this makes sense when customers are likely to choose one service or the other, with very little overlap. The classic example is the RCA-Sony radio case brought by Clayton Christensen in “The Innovator’s Dilemma” (a must-read book for anyone in business). Customers may want a furniture high-quality radio from RCA, or they may want a cheap transistor radio from Sony, but they are unlikely to want both. And even if they do want both, it is likely that they accept the need to pay for both independently, even if bought from one retailer, who himself sources it from two manufacturers. But Netflix’s customers are retail, Netflix is the retailer who sources items, from whom customers want a single source of information – and as Henry Blodget points out, around half of Netflix’s customer base actually wants both. As such, splitting the business hurts the customers and the business. True, it is unlikely that any other business will pop up to offer both, since no one will go into the DVD-by-mail business at this point, but this is a business that could bring end-of-life profits for several years to the whole, and drive later adopters in.

Given the above, I am not sure I agree with Hastings’ rationale. His aggressiveness and willing to take risks for the long-term are to be commended, but sometimes they do lead to making real mistakes. I am afraid this may be one of those times.

About Avi Deitcher

Avi Deitcher is a technology business consultant who lives to dramatically improve fast-moving and fast-growing companies. He writes regularly on this blog, and can be reached via Facebook, Twitter and avi@atomicinc.com.
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