Rain Dances, The Forecast

Netflix Is Rebranding DVD Delivery Business…But WHY?

Netflix angered a lot of customers in July when they announced a 60% price increase, and as a result, both their subscription forecasts and stock prices have taken significant hits.  They explained the price hike thusly:  the Netflix streaming service didn’t cut into the DVD business as fast as they expected it to, and they need more revenue to continue supporting the DVD delivery side. 

Last night Netflix CEO Reed Hastings made another announcement that Netflix DVD delivery and streaming services would be split into two separate lines of business.  Hastings also acknowledged and apologized for the PR blunder this summer when they announced the initial pricing changes. 

The DVD business will now be known as Qwikster, and will have its own leadership, but will remain a part of the Netflix company.  The announcement is raising ire among analysts and consumers alike. 

From a Netflix customer perspective, it sounds like a load of malarkey.  Customers who had access to both streaming and DVD content through one website and one subscription will now have to deal with two…and they’ll both be more expensive.  As we discussed back in July, the price hike will continue to drive a lot of DVD rental business to competitors like Red Box. 

From the “analyst” perspective, it makes a tad more sense – Netflix wants to discourage the DVD business (with its higher overhead costs) and shift customers into the future of streaming digital content.  The company has made no bones about this.  They want to drive streaming-only plans.  Some even say that Hastings is just frustrated that people just aren’t moving to streaming fast enough, and that he’s trying to “force them to go faster.”

But delivering streaming-only plans has come with a few serious problems.  First and foremost is content.  Licensing for DVD and streaming content work completely differently.  DVDs are easy – Netflix pays once for the DVD and isn’t responsible on a per-rental or per-viewer basis.  License fees to stream digital content are based on a number of subscribers. 

In other words, if a Netflix customer pays for a DVD and streaming “hybrid” plan Netflix pays licensing fees for that subscriber’s streaming access.  Even if they never watch a thing.  That’s potentially a lot of license fee paid out by Netflix for which they really can’t recoup any value. 

It’s like a revelation when you see the connection – splitting the two businesses will eliminate the hybrid plan (which a solid half of Netflix customers have now).  Eliminating the hybrid plan will enable Netflix to isolate its streaming subscribers from the DVD delivery customers and control licensing costs.  Netflix is banking on the fact that it will be able to negotiate lower streaming license fees on a smaller subscriber base. 

Hopefully this reorganization will also open the door for Netflix to bring some more, better content to the streaming service.  Hopefully this will translate long term to more value for customers. 

The whole thing leaves me with the following thought:  Isolate the problem to solve it. 

HP recently “killed” its tablet and is spinning off its PC business in order to focus on the cloudy software and services-oriented future.  Netflix is now rebranding and separating its DVD delivery business in order to focus on its cloudy streaming-oriented future. 

Maybe this applies to us as well – how can we isolate the “pc repair” side of our businesses in order to focus on the cloudy consulting and services-oriented future? 

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