The Chutry Experiment

Earlier today I posted some quick snap judgments on the Netflix announcement that they would be spinning off their DVD-by-mail business from their streaming video service. The DVD-by-mail service will now be called Qwikster (which I still think is a goofy name, although I amused that someone has already claimed the @qwikster Twitter handle), and subscribers who maintain both the DVd and streaming services will now be billed separately. Prices, we are told, will not change after Netflix’s recent price increase, and the DVD-by-mail service will now allow users to rent/borrow video games, as well as DVDs. My initial reaction is that this decision goes against Netflix’s brand as a long-tail company that provided users with a vast selection of DVDs that would be delivered, in a relatively timely fashion, to people’s mailboxes, fulfilling expectations for convenient and cheap access to a comparatively large media catalog (note: Will Richmond makes a similar argument regarding Netflix’s core business model). By cutting off the DVD-by-mail service, Netflix is hanging on to digital delivery, with its limited catalog of titles.

Of course, as Scott Macauley points out, venture capitalist Mark Suster sees this as a “genius” move, one that will allow each company to separately focus on these different interests. Suster adds that Hastings’ email is brilliant because he apologized for past communication failures and offered a transparent explanation of his business plans (which seem to involve getting rid of the DVD altogether). But Suster’s argument, which builds upon Clay Christensen’s work, seems to place too much emphasis on the idea that technological change is always beneficial, implying that DVDs are “obsolete” technologies, and implicitly comparing the stubborn use of DVDs as equivalent to using “shitty” products like MapQuest when Google Maps was available. New delivery methods are not necessarily better. DVDs (and other physical media) often provide richer movie consumption experiences and, in some cases (such as classroom instruction), they are more practical.

Similarly, New Tee Vee argues that Netflix is simply paying attention to Wall Street in recognizing that DVD is a dying business and using Qwikster to protect Netflix’s lagging stock prices. There’s probably some truth to that, but I think New Tee Vee is also correct that splitting off the two will only reinforce the divide between the two services, making it even more likely that consumers will quit one or even both services, especially given the increasing impatience with high entertainment prices (the so-called “affordability crisis,” which affects not only cable subscriptions but also movie ticket prices and other subscription services).

Thus, like Henry Blodget, it’s hard for me to see Hastings’ blog post/email as anything other than further justification for reduced services and smaller catalogs, the two attributes that won me over to Netflix after years of supporting (mostly) independent bricks-and-mortar video stores. Blodget does offer one further alternative explanation for why Netflix may be making this move, and it has to do with the nature of the divide between DVD/physical media and streaming video.  Citing Bill Gurley’s blog post, he points out that the two delivery systems are actually significantly different. For the DVD service, Netflix simply buys whatever DVDs it feels it will need to meet consumer demand, but for streaming, there is some speculation that Hollywood studios may be demanding a monthly licensing fee for every Netflix subscriber. Splitting off the two services might make it easier to make this fee more manageable.

Ultimatley, public perception matters, and as David Poland notes, this is where Netflix really seems to be losing. Poland’s comparison to the announcement of “New Coke” is an apt one. This may be a good business decision–although I’m not fully convinced–but it makes me (and apparently many other people) like Netflix a lot less. It’s a surprisingly tone-deaf move, one that honestly makes Netflix look like just another digital delivery system.