Netflix (Partially) Comes to Its Senses, Drops Qwikster DVD Plan

Whew. Sanity has (partially) returned to Netflix as the company has announced that it won't pursue a colossally misguided plan to split off its DVD operations as "Qwikster" after all. A blog post from CEO Reed Hastings begins "It is clear that for many of our members two websites would make things more difficult, so we are going to keep Netflix as one place to go for streaming and DVDs."

While this is certainly true, what the post leaves unsaid - but which is even more fundamental to Netflix - is that DVDs remain absolutely essential to the company's success and will for some time to come. By not fully embracing this, the company seems to be ignoring reality. No doubt this led to the Qwikster move in the first place, and now also raises the risk of additional missteps down the road.

To be sure, Netflix deserves huge credit for driving the streaming side of its business, which has been the main reason for its rapid growth over the past 2 years (until the expected Q3 subscriber hiccup). But the streaming service's appeal is only as good as the content it offers. Netflix benefited from a huge headstart in gaining streaming content rights vs. its competitors that was funded from by its incumbent DVD-by-mail business. Netflix also got a headstart in integrating with numerous connected and mobile devices.

Now however, that headstart is effectively over. In particular, Amazon, Hulu and DISH/Blockbuster have all stepped up their content acquisitions and enhanced their services (just since the Qwikster split was announced Amazon added Fox content and launched its new Kindle Fire; Hulu signed a deal with Univision; and DISH announced the Blockbuster Movie Pass service). Should Amazon or Google acquire Hulu, and then pour their deep resources into further beefing up Hulu's content, it will become even more appealing to subscribers. Also looming are YouTube, Wal-Mart/VUDU, Apple and plenty of other Netflix competitors.

Yet another huge content challenge for Netflix is that pay-TV operators and cable networks are closing ranks to preserve their healthy ecosystem and further their TV Everywhere goals (Starz's recent stiff-arming of Netflix is a perfect example of this). Meanwhile both Hulu and Amazon have closed the gap in integrating with connected and mobile devices, as others inevitably also will.

So even though Netflix has continued to add new content (in the last few weeks gaining DreamWorks Animation, AMC and Discovery content), the reality is that it enjoys little content acquisition advantage, particularly given content providers prefer non-exclusive arrangements and many of Netflix's competitors have far deeper pockets and/or the ability to subsidize content in the pursuit of larger goals (e.g. Amazon selling Kindle devices).

In this context, what's Netflix's best advantage? Its super-efficient, and nearly-impossible-to-replicate DVD-by-mail infrastructure. Given the inevitability that streaming will eventually win out, competitors would be hard-pressed to create a business case to match Netflix's formidable DVD operation. But that inevitability is still years down the road given the tangle of content rights and Hollywood's motivation to have multiple buyers in multiple distribution windows.

All this creates a huge opportunity for a Netflix combined DVD/streaming service to offer comprehensive choice AND immediacy/convenience that nobody else can (with the possible exception of DISH/Blockbuster). Rather than solely promoting streaming, as Netflix has, it should be positioning itself as the only company that fulfills ALL home entertainment needs of its subscribers. As recent research indicates, the fact is that DVDs are still more popular than streaming for watching Netflix's content on TVs. If you've tried - in vain - to find a high-quality, fairly recent movie to watch on Netflix streaming (as I have), you understand why that is.

Netflix's decision to split off DVDs made no sense and ignored key elements of the company's market position. It decimated the company's stock price and likely spiked churn and slowed new subscriber acquisitions in Q3. Thankfully the Netflix team has come to its senses and abandoned the Qwikster plan. Rather than running away from DVDs, the company now needs to take the next step and embrace them for all their near-term advantages.

Categories: Aggregators

Topics: Netflix