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Today, Netflix CEO Reed Hastings sent out an email to subscribers, posted to its blog, and with a YouTube video announcing that, in addition to the pricing increase, they would be separating their DVD operation into a separate business, Qwikster, led by Andy Rendich (former head of DVD operations). They highlighted, again, the different (business) needs of the two. Reed Hastings said, “Over the long term, DVD and streaming are gonna get more and more different. Streaming has incredible television shows, streaming is instant, streaming is fairly global, streaming has many things that make it different from DVD. And that over time, both DVD and streaming will be much better because they are separate…”

As a business professional, I understand their quandry… it is a lot simpler to fully manage profit & loss statements on a service by service basis. Furthermore, silo’ed operations – such as that of a cable company that uses a separate technology platform for their multiscreen solution compared to their traditional VOD services – can be easier to get up and running faster (no disrespect meant to the many great cloud video platforms being launched). However, the long term costs – in terms of duplicate metadata creation, managing subscriber plans in multiple places, and trying to provide a seamless user experience on multiple systems, decreased the perceived benefits over time.
Most importantly, however, Netflix has failed to see things from the customer perspective. Customers want integration of their entertainment experiences, and want to be able to select content regardless of the source. Today, customers must already navigate a fragmented world of live TV, YouTube for short content and some web TV shows, hulu or broadcaster portals (i.e., fox.com) for recent TV shows. Long tail content is split between Netflix, operator VOD, DVD sales and reruns. Netflix and Qwikster sites won’t be integrated – which will fragment the queues and decrease the value of ratings (something Netflix got right from the beginning). This change goes against the grain of the value of the bundle – with cable providers and telcos moving their attention from triple play bundles (phone, TV and internet) to quad play bundles (adding wireless services). The ‘carrot’ announced to customers of Qwikster is the addition of game rentals (for XBOX 360, Wii and PlayStation 3) to the service as an add-on.
Judging from comments on the blog, and on YouTube, Reed Hasting’s statement at the start of these announcements “I messed up. I owe everyone an explanation” is just the beginning to its US fan base, and possibly to investors. Netflix is a great company. Their move to the fast growing TV markets of Latin America provides great potential (as DirecTV has shown) – although low broadband penetration will provide slow growth potential. In my mind, the DVD service helps increase the value of the streaming service – due to both technological (i.e., low broadband penetration) and content (release window) limitations. Netflix’s failure to recognize the power of the bundle in customer’s minds will continue to be a source of friction.

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