What we got here is ... failure to communicate

Netflix started its streaming service as an add-on to its DVD rental business. As streaming became more and more accepted and desirable by consumers, Netflix decided to separate its DVD rental and Video streaming businesses - streaming had gotten too big to be treated as an add-on. This seems like the right move. Why then the huge backlash against Netflix splitting the two?

The overlap between Netflix's DVD rental and streaming businesses is likely still significant, but declining.

Consider the back-end costs that are common to the two services. The DVD rental costs are likely dominated by the cost of acquiring physical DVDs, running the DVD shipping/receiving operations and US Postal Service charges. Whereas the streaming costs are dominated by the streaming infrastructure that Netflix has built in the last few years and the cost of acquiring streamable content. The only overlap that I can see is the netflix.com website (recommendation engine, queue management, billing and the like). As Netflix spends more money on expanding the content and the reach of the streaming service, the cost overlap of the two businesses decreases further.

Next consider the competition. In the DVD rental business, competition comes from the surviving mom-and-pop video rental shops, the remaining Blockbuster and Hollywood outlets and kiosks from companies such as Redbox. In streaming, the competition includes some of the same companies - Blockbuster in particular - but also heavy-weights such as Amazon, Apple, YouTube (Google), Hulu, Vudu (Walmart) and Yahoo! Video. Add to that new streaming offerings from CableTV and SatelliteTV companies and you have a competitive landscape that looks very different from the competition in DVD rentals.

Finally, consider the customers. Netflix's original customer base was DVD renters in the US. As the streaming service became popular, it likely attracted streaming-only customers who had little interest in DVD rentals. As Netflix expands the streaming service to countries outside the US, all the customers that it gains will by definition be streaming-only customers - since Netflix does not offer DVD rentals outside the US. Thus the overlap between DVD rental customers and streaming customers can only decline over time.

The backlash to Netflix's recent moves - a net price hike for DVD rental + streaming customers and separation of the DVD rental business under a new brand-name (Quickster) - must (by definition) come from customers who use both services. Why are they so worked up?

Strategically, Netflix is doing the right thing by gearing up to fight the streaming battle and shedding its DVD rental roots. However, the backlash demonstrates that Netflix is going about this change in too abrupt a manner. DVD rental customers have been tireless advocates for the company over the last decade. These customers must feel jilted now - not only do they pay more, but the DVD service is not going to be from "Netflix" any more. Would these customers really promote Quickster with the same zeal as they did Netflix?

Perhaps Netflix would have been better off, taking more incremental steps towards separating the two businesses, thereby preserving the goodwill from its loyal DVD rental base for longer. Netflix could communicate the direction that it is headed in, but give its DVD rental + streaming customer base, more time to adjust to the coming change.

And finally, Netflix should leave the Netflix logo (and the brand) on the DVD mailers alone. Nobody needs a reminder that they are getting old.


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