In another perplexing move, Netflix decided that it won't separate its DVD-by-mail and streaming businesses after all
If you're a Netflix subscriber, on Monday you got yet another e-mail describing a policy change. A little less than a month ago, the company announced that it would separate its DVD-by-mail and streaming businesses into two separate entities. Netflix would continue to stream, and Qwikster would be born to conduct its mail service. Netflix said the move would benefit customers, because the businesses are very different. So why the sudden change of heart?
Let's start with the precise reason Netflix provided back in September for creating two separate businesses:
So we realized that streaming and DVD by mail are becoming two quite different businesses, with very different cost structures, different benefits that need to be marketed differently, and we need to let each grow and operate independently. It's hard for me to write this after over 10 years of mailing DVDs with pride, but we think it is necessary and best: In a few weeks, we will rename our DVD by mail service to "Qwikster".
This was said to be done in response to the outrage over Netflix's big price hike announced in July. Consequently, in an note to investors on September 15th, the company said that its subscriber base for the third quarter would be about a million customers smaller than anticipated. This caused its already hurting stock to plummet. Three days later, presumably in full crisis mode, the company made the Qwikster announcement.
The Logistics Killed It?
So why the 180? Here's the reason Netflix provided in a blog post yesterday:
It is clear that for many of our members two websites would make things more difficult, so we are going to keep Netflix as one place to go for streaming and DVDs.
More difficult how? Netflix had said that its customers who used both Qwikster and streaming would have to manage two separate queues. Some subscribers complained that this would just make matters worse, because it would make more work for them. But presumably, Netflix could have found a relatively easy way to streamline this process through some basic computer programming.
You could imagine Netflix having three options for each title "Add to Qwikster," "Add to Netflix" or "Add to Both Queues." Really, you had to manage your streaming queue somewhat separately before anyway. Why was this change so logically insurmountable? But maybe some additional business issues known only to Netflix prevented the logistics from working here.
The "Solution" Didn't Solve the Problem?
Or maybe Netflix decided to avoid a relatively small headache of working out those logistics by just killing Qwikster, because the company realized that the plan didn't help to pacify its angry customers. From the start, the strategy never really made sense as a response to the outrage over the company's July price hike. Since this solution wasn't a solution at all, maybe Netflix just nixed it.
Customers Still Prefer DVD-By-Mail?
Now that Netflix customers have had several months to digest the price hike, Netflix could be seeing more switch from a combo plan to DVD-by-mail only. I did. As I have argued before, Netflix's streaming business just isn't there yet. Its titles are very limited, and unless you have a Blu-ray player, TV, or gaming console that supports Netflix, you have to watch them on a computer, netbook, or tablet -- which few outside college probably prefer.
If Netflix sees its customer base shifting to prefer DVD-by-mail for the time being, it might not want its name associated with the product that is bleeding subscribers or is becoming less popular. This could send the wrong message to investors. Although streaming may be the future, the future isn't here. Removing your company's name on a product that is doing well now and leaving it solely on the product that you hope will succeed one day seems like an ill-advised strategy. We'll have to wait for the company's third-quarter numbers to see how streaming subscriptions are faring.
No One Wanted To Purchase Qwikster?
When Qwikster announcement was made in September, some analysts said that the only reasonable explanation for the move was that Netflix hoped to spin-off and sell its DVD-by-mail business so it could focus on streaming. In theory, it would be easier to sell if it's a self-contained company.
After hearing this theory, I wondered: okay, but who would want Qwikster? Netflix asserts that streaming is the future and that DVD-by-mail suffers from high costs. So it would hope to sell a cost-intensive company that is becoming obsolete. This would sort of be like if AOL tried to sell its dial-up service. Maybe Netflix began shopping Qwikster around for the past month and quickly realized that no one was interested. So instead, it now figures it might as well continue to provide the service until its streaming company is robust enough that few use DVD-by-mail anymore, and it can shutter the operation.
Reactive Management Strategy?
This week's decision to keep the DVD-by-mail service under the Netflix name appeared to have been applauded by Wall Street at first: its stock opened on Monday up more than 7%. But by the end of the day, it closed down by about 5%. It's off a bit again this morning.
I would think investors would be troubled by all of the policy changes going on at Netflix over the past couple of months. First, it raises its prices drastically, creating severe customer backlash. Then, it seeks to respond to the problem of subscribers leaving with a solution that doesn't really respond to the problem. But rather than stay the path, it changes its mind a month later.
Management doesn't appear to be thinking through the company's major decisions. Didn't Netflix conduct a focus group to gauge the reaction to its July price hike? Did it have a clear, strategic play to its August Qwikster strategy? The answer to both of these questions appear to be "no." Netflix's last two policy shifts may be simply reactions, instead of the company proactively figuring out ways to shape its strategy for success. That should scare investors.
Image Credit: REUTERS/Brian Snyder