Netflix’s recent decision to split itself into two businesses (Netflix for streaming, Qwikster for DVDs) has been a source of confusion and consternation all over the web. Netflix does explain their reasoning, though. Not in the most recent announcement, but in the announcement of their price change in July:
Given the long life we think DVDs by mail will have, treating DVDs as a $2 add on to our unlimited streaming plan neither makes great financial sense nor satisfies people who just want DVDs.
Note what’s left out. For whom does “DVDs as a $2 add on to… streaming” not make sense? Netflix, not streaming customers. The other half is more or less accurate, DVD-only customers have several options and may be more price-sensitive.
And why does that not make financial sense? Presumably, the studios are forcing Netflix to pay per-customer for streaming licenses. If that’s the case, Netflix might see the scenario this way: If we split up our customers (most of whom mostly use one method or the other) into two bins, we profit even if they all choose one or the other. Why? Because even though they’re now paying 80% of previous, the streaming expenses are cut in half. Win-win, right?
The risk relates to the fact that there’s a big difference between all-streaming and mostly-streaming. The convenience of renting a DVD when streaming was not available patched over the lack of streaming selection. “A $2 add on” might not make financial sense to Netflix, but it makes perfect sense to customers who view it as a patch to a bug that, in their view, is Netflix’s fault. $2/mo. is low enough to feel “basically free”, $8/mo. is not. Thus, this move may cause some streaming customers, instead of picking sides, to leave entirely.
Therefore, it should be clear that the price change is not a grab for $6 more per month. Separating the sites, marring the user-experience and reducing convenience (when this is all about convenience) is a clear anti-feature. Netflix really wants people to choose sides, and was willing to cut prices to give them an incentive. And where carrots are insufficient, let the beatings commence!
My guess is that Netflix is in a bit of a catch-22 here. They can’t fix the selection problem while DVD streaming is an option. Even if Netflix can convince a studio that they “have to be on Netflix”, the studio can just shrug and say, “So? They’ll just get it on DVD.” On the other hand, the “have to be on Netflix” argument depends on the popularity of Netflix, which may depend on “DVDs as a $2 add on”, so staking everything on “streaming or nothing” is not without risk.
It’s a dramatic case of business negotiations. Netflix is trying to convince the studios that they need Netflix to win (quickly) in the streaming video market, then holding itself hostage, threatening to shoot if the studios don’t renegotiate.
More than that: Netflix shot itself first, and is daring the studios to let it die.
(Context: I’m not a Netflix investor. I am a Netflix subscriber. I subscribe to both DVDs and streaming. Before the split I would have paid the extra money, but now I’ll probably cancel the DVD-by-mail service and keep streaming… for now.)
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