Netflix Moves Like a Startup

Update 10/10/2011: Ahh the joys of watching business do what it does best in today’s age: Change. Turns out that Netflix actually does give at least half a damn about it’s existing customers, and at least nixed the idea of spinning off the shiny plastic disc business that would’ve been Qwickster.

From Ars Technica:

The change seemed needlessly drastic and complicated for many users, forcing customers to be billed twice and to search for DVD and streaming content on separate websites. But now, Netflix customers will never have to hear the word Qwikster again.

For anyone who took a marketing or branding course in college, I think Qwickster will be a nice sidebar on the chapter that mentions the folly of New Coke. I admire Netflix’ gutsy move to try to shed & alter their core business, but obviously they were too severe in their actions. Internally, I’m sure there’s still a deep divide within Netflix between the DVD logistics folks & the streaming service folks, but for now NFLX customers can relax a little bit… and get back to venting frustrations over the price hike.

… and here’s the original post …¬†

I’m in the middle of reading Do More Faster – a book of short essays by the folks involved in the TechStars group – and I’m taking to heart lots of the worthwhile tidbits of startup advice. Especially on the verge of launching our new startup – Dashter – I want to make sure we’re building more than just a “startup” – we’re building a full-fledged scalable in-demand business. More on that later.

What caught my eye this week is Netflix, and how they’re acting so nimbly right now it’s like an awesome case study in watching a startup turn in to a big business only to remember it’s a startup again.

I just recently became a Netflix customer (streaming only) having come from Blockbuster’s DVD-by-mail program. But with the addition of a couple AppleTV’s in my house, streaming on-demand service was a no-brainer. So when I see an article like, “Who Stole Netflix’ Mojo?” on c|net (in addition to mountains of mainstream coverage from Yahoo! News to KNX1070 news radio mentions), my consumer-brain goes, “Oh no – did I buy a bad product?” Then my startup-brain fires back: “Go Netflix, Go! :)”

Netflix essentially pioneered the DVD-by-mail business. They mainstreamed it, and I watched Blockbuster fold under the weight of the pressure ‘flix bore down on them. It was an innovative concept – driven forward by the nearly universal acceptance of the DVD format, cheapness of mailing little plastic discs at scale, and the rights to rent a single DVD virtually unlimited times. Killer business model. But after several years of driving that model forward, I’m reminded of the Boston Consulting Group Matrix found in virtually every business college textbook.

The DVD-By-Mail business is a relatively stable cash cow. It can grow, certainly, but it’s really run its course. There’s almost nothing Netflix needs to do – or can do – to innovate that business. They made recommendations easy, they’ve built online tools to make managing a queue easy, and they’ve got their distribution system down pat. So why in the world would a company like that split off that business in favor of a streaming company? Simple: Streaming is huge.

I’ll give my own anecdote here: Since getting Netflix and my AppleTV’s, I haven’t once turned on my DVD player. And I consume a pretty hefty amount of TV & movies. Streaming isn’t just the side-business of Netflix – It’s the future of the business. Broadband adoption is high, digital TV’s are everywhere, and between Apple TV’s, Google TV’s, PS3’s, and Xbox’s – Netflix has a massive distribution advantage in streaming to the living room. They also have the connections to the major studios and distributors to figure out how to cut the best streaming deals.

So watching them split off their DVD business may be jarring to many consumers – especially those who grew used to having all-you-can-eat from Netflix for a while. As a new customer, I don’t notice the change, so I’m barely affected.

From a startup perspective – they’re building their business for the right model – and for their future. The businesses are so fundamentally different. Think about it:

Streaming Business Costs:

Media servers, unique streaming content licensing agreements, internet bandwidth, customer acquisition marketing.

DVD-By-Mail Business Costs:

DVD inventory, mailing, customer service & support, customer acquisition marketing.

Streaming Business Revenue Potential:

Massive. Between hand-held devices, tablet devices, computers, and the living room – a streaming business can be everywhere at all times. With market position and licensing leverage, streaming has very low fixed costs and massive ROI. Assuming, of course, they can get the deals done the right way.

DVD-By-Mail Business Revenue Potential:

Massive, yet largely realized. Certainly not every American is a Netflix customer, but it’s not like they killed that business. They just shifted their focus from their cash-cow to their shooting star. But in a digital era, transporting little plastic discs is just a transitory activity. Chris Anderson’s Long Tail showed us clearly enough that if it can go digital, it will go digital – in time.

Streaming Business Team:

The people behind the streaming business will be different than those behind the DVD business. The entire staff of the organization will have different priorities, different incentives, and different metrics to go by. This is the startup venture – a fresh team with a fresh take on how entertainment should be available to consumers.

DVD-By-Mail Business Team:

The DVD team needs to be focused on logistics, infrastructure, and sustained growth in the single to low-double digits. This is the cash-cow after all. Keep the revenue coming in while staving off competitors in the shiny plastic disc business like Blockbuster (done) and Redbox.

Netflix and the new Qwickster are different businesses. That’s why I’m thrilled to see the company treating itself like a startup. They’re taking quick & decisive action at a point where it’s required. Over the last few years especially, we’ve seen what happens to slow-moving companies caught up in their own corporate self-worth completely miss the mark on the shifting market. The world is running fast. CEO Reed Hastings is blazing a trail faster than anyone can keep pace. He’s refusing to let Netflix become Yahoo! or MySpace. Instead, he’s pivoting fast, driving forward, and building a new startup from the inside.

Who knows if this is the right direction for the firm. Certainly long-time customers of Netflix may be frustrated because they got to benefit from the overlap while the streaming business was building from the inside. But they’ll get over it. So will investors. This big, lumbering, publicly-traded company is acting like a nimble, nothing-to-lose startup – and the startup-side of my brain is right there with ’em.

3 thoughts on “Netflix Moves Like a Startup”

  1. I completely agree with you, Dave. Reed Hastings has cajones to suck it up and take the heat — but in the long haul he’ll be hailed as a “visionary” with “bold leadership.”

    As for whether Hastings fumbled the PR of the news, again I’d say “no.” With a move like this, it’s going to piss a lot of people off, no matter how you sugar-coat the message. The hullabaloo will pass, and Netflix will still be here. Qwikster? It will have it’s run, but I think we can all see where that bus is headed.

    For what it’s worth, I’ve been a LONG time Netflix subscriber (since they launched). I subscribe to both streaming and DVDs, with the Blu-Ray add-on. But in reality I’m only consuming about 1-2 DVDs a month. Most of my viewing is streamed. I’ll keep both my Netflix and my soon-to-be-created Qwikster account (maybe even use it to rent games for my Xbox 360). But I foresee a day in the not-too-distant future when the DVD will go the way of the CD.

    By the way, if anyone wants to buy a big box of old–er–GREAT music CDs, give me a buzz.

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