Tuesday, September 20, 2011

Netflix and Qwikster: What are they thinking?

Why did Netflix decide to split itself in half?  Why create a new brand called Qwikster?  Most people have criticized the move quite heavily.  Slate has an interesting article about the decision

I think it's an idiotic strategy.... And yet: It could work. In The Innovator's Dilemma, Christensen argues that the companies that are most vulnerable to disruptive technologies are those that have really good management. The problem with good managers is that they tend to listen to customers. And the problem with customers is that they don't always know what's best for them. If you were a devoted Blockbuster customer in 2001, and if Blockbuster's CEO sent you an email announcing he was closing all the company's stores and switching to a DVD-by-mail service, you would have balked... As Christensen explains, disruptive technologies usually start out as inferior substitutes, proving attractive only to a small fringe of customers. For years, the people who ran Blockbuster saw Netflix as irrelevant. It's easy to call them stupid now, but at the time they were mostly right. Blockbuster's customers considered Blockbuster better than all the alternatives; if they didn't, they wouldn't have been Blockbuster customers. And Blockbuster's managers were doing what good managers do—they were investing in the parts of the business that customers liked (opening more stores) rather than coming up with a whole new business that might alienate their current users.  The key advantage of Netflix's new model is that it will give each side of the business—the DVD side and the streaming side—flexibility to manage its service in a way that pleases its own customers. As a combined service, any move to strengthen one side of the company over the other would have been perceived negatively by one group of customers. 

For me, the negative reaction to the move has more to do with the seeming inconsistency of management's actions than anything else.  Several months ago, Netflix championed an integrated service at a low price.  Then, they raised prices dramatically on the integrated service, but allowed customers to opt for a lower priced streaming-only service.  Then, after a short period of time, they announced a split into two brands, one for streaming and one for DVD-by-email.  The series of changes in strategy over a short period of time give the impression of a management team unsure of how to move forward.  That makes investors uneasy (rightfully).  Secondly, people have criticized the move because they don't necessarily see the connection between setting up a separate business unit and establishing a second brand.  In Christensen's writings, he provides several good examples of companies establishing independent units to pursue an innovation, without necessarily creating a new brand. Take IBM's creation of a unit to launch the personal computer; it existed independent of the mainframe business, but it leveraged the existing IBM brand.

Despite all the questions, I understand Netflix's predicament.  They face unchartered waters, as a young growing company facing the inevitable demise of the original business.  In the old days, companies may have experienced the disruption of their core business after decades of success.  For Netflix, that demise of the core may be occurring just a decade after the firm rose to prominence.     

3 comments:

Justin Dorval said...

Seems as though Netflix is positioning themselves to get out the physical DVD market and only deal in streaming. The DVD market is becoming obsolete and Netflix is trying to find a way to separate the buisness to eventually drop that side completely. From a strategy standpoint I can see where they are going, but I dont think they are going about it in the correct fashion.

boggioa said...

I want to add a comment that considers the legal perspective. It is a smart move--probably not delivered to consumers in a timely and successful manner. They are separating the assets, with the more established brand going with the more successful business. The best assets, when aggregated, are more valuable and the business could be sold in the future without the weight the of DVD business. In addition, possible losses generated by the weaker business are less likely to affect the strong part of the business.

Michael Roberto said...

Justin, I think you are right on the money.