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TMFPostOfTheDay (< 20)

The Netflix Split

Recs

9

September 20, 2011 – Comments (4) | RELATED TICKERS: NFLX

Board: Netflix

Author: AlejandroOrtiz

As a Netflix customer...

I was not happy about the price change and I knew right away the I personally was not going to pay a premium to have my DVDs delivered when Redbox is two blocks away and the one Blu-ray I get a month is only $1.50. I was a little peeved at the moved but understood the change.

I think that most customers know that it is expensive to deliver DVDs as quickly as Netflix has been doing to every subscriber. I'm pretty confident of that. What I am not quite as confident about is that everyone knows that the DVD business is dying. Physical media as whole is downtrending.

I see the trends and understood the move that Netflix had made. The model that made the company was changing and they needed to adapt or eventually feel the pain of sustaining a declining model. I knew right away that Netflix was being smart in anticipating the change in the marketplace and the need to put distance between physical media and concentrate on streaming content and profits.

As a customer I was not happy that now I had to make trips the Redbox machine but at least I had a choice. I also knew that Redbox's business model was not going to last forever before it too had to be re-invented or be relegated to a niche industry. So, if I want to rent a Blu-Ray disk I had a place to go and I'm cool with that. My Netflix account is cheaper for me now with streaming only and I can still get a DVD I need to.

I adapted and I changed.

As an Investor...

I thought it was smart for Netflix adapt and change as well. Netflix knew that their new pricing model would cost them some customers so they told investors to expect the loss of approx. 400,000 customers. They knew some folks would not get it and go elsewhere. Is this arrogance or reality? Maybe it’s just bad marketing due and a lack of proper customer education when a company charts a new path. You decide. However, no one argues that the model needed to adapt.

Now that Qwikster has been announced, is it smart that the company would create a whole new brand and the marketing that goes along with it, instead of just reintroducing a new combined pricing structure?

Yes.

It's going to wither on the vine eventually. Separating physical media into Qwikster is a brilliant move. Eventually, when it does wither it will shrink without dragging the Netflix brand with it. They just should have announced this the same day the announced their new pricing model. Hence, the arrogance.

The fact the 700,000 customers were lost may have humbled enough them to treat their customers with a little more respect but their strategy has not changed. Delivering DVDs to household is dying and no one is going to change that. The introduction of video game DVD offerings does not change the outcome. DVDs are dead.

Qwikster is the new name for a declining model. Netflix remains as an industry leader in the digital convergence landscape and is now free to negotiate with studios, compete, and deliver the best content available.

Netflix’s execution of may have been ill conceived but their recovery was noteworthy and telling of a strategy for the future of the company that will serve investors well.

Alejandro
(who has no holdings in Netflix but thinks this may offer a good opportunity to buy)

4 Comments – Post Your Own

#1) On September 20, 2011 at 11:54 AM, Goofyhoofy (< 20) wrote:

Separating physical media into Qwikster is a brilliant move. 

Separating into a different business is a disaster, even worse than separating the businesses into two separate pay models.

With two different businesses, the data pool of 'suggestions' just got half the size. The maintenance by customers of two separate accounts just got twice the trouble. (When I find something I want, do I add it to two queues instead of one?)

Without the strength of the combination of two-in-one, it makes each business more susceptible to a competitor. Apple or Amazon can now directly target the on-line customer with lower prices, superior offerings, or both. They couldn't do that before, because people were using both; now they are forced to choose (except for a small fraction who continue to pay for both.)

Netflix should not have separated the pay schedules so early. The on-line was already growing and the hard media dying; a better play would be just to continue to support both - at whatever pricing cost - until one was near death anyway. Clearly that was not the case yet. Now, separating them into two discreet businesses will impact both negatively.

(For a example, go back to Toys-R-Us which spun out Babies-R-Us, and in so doing lost an entire generation of customers walking into the Toys-R-Us stores because they no longer had to in order to get snuggies, cribs, or baby toys. Meanwhile Babies-R-Us lost all the Toys traffic, which meant mothers who would have come in to buy stuff for their infants - or friends baby showers - were more likely to go to Target or elsewhere. Neither business did better, and I suspect Netflix has made a huge gamble - two of them actually - which is not likely to pay off for investors.) 

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#2) On September 20, 2011 at 12:33 PM, Mega (99.96) wrote:

The DVD distribution half was still showing decent growth until the price hike...

Yes, this business would have peaked eventually and started to decline.  But the price hike and separation forced the peak and decline much earlier.

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#3) On September 20, 2011 at 7:13 PM, TMFMoosie (< 20) wrote:

I agree with Goofyhoofy, and would like to add that while I personally stream content to my laptop, I don't yet want to set up my living room TV to receive content. Perfectly happy turning on the DVD player there, for at least a few more years.

 Then there's the issue of content. There just isn't nearly enough content to stream! You might say, yes, but they'll get there. Fine, but from a customer perspective, if I want selection, I now have to go elsewhere, Quikster, or someone else (and based on the way they've handled this and made my life harder, my inclination is "someone else")

 It seems the ultimate arrogance to imply that they'll keep me as a streaming customer even though they have little content compared to the DVD library. If they would counter that it will dramatically improve soon, I say fine, do the switch then. Don't ask your customers to wait, and to pay you, while you build the business they're paying you for.

 From both a customer and investor perspective, I'm surprised and disappointed by the tone deaf handling of this situation.

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#4) On September 21, 2011 at 12:32 AM, bearcreekzeke (< 20) wrote:

You hit the nail on the head Moosie.  I canceled my streaming plan today and will remain with the 1 dvd Qwikster Plan.  I don't mind paying a couple extra bucks a month for the novelty of streaming, but usually struggle to find anything even half-way decent to watch.

I believe they should have raised the price for the combined 1 dvd/streaming plan by a couple bucks and explained to customers that the price increase was necessary to pay for increased content on the streaming side.  This would still have represented solid value and customers could have understood the rationale for the price change.  The virtuous cycle could have remained intact.

As it is, I think Netflix completely underestimated its customers' demand for new release movies, which for the most part are nowhere to be found on the streaming side of the business at this time.  Now that people are being asked to pay so much more for streaming, which has inferior content, I believe they will leave the streaming plan in droves.

This seems to have caught Netflix totally by surprise.  How in heaven's name will they pay for all this new content for the streaming side of the business when they are going to lose millions of subscribers?  They can't raise their streaming prices anytime soon without another PR nightmare, and if they are unable to obtain fresh new content for the streaming business, they are finished.  

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