Netflix should be able to walk and chew gum at the same time. There are a lot of successful companies that are much more diversified than Netflix is right now. This honestly strikes me as a panic driven move in response to the customer rage and their precipitous drop off in stock prices.
I'm trying hard but can't see the upside to this move. And I think this will cause a big hemmorhaging in profit for the short/medium term. Netflix has 12 million members that are on both the DVD and the streaming plan. These are the folks that got the 60% price hike. Although Netflix lost some customers (~5%) after the pricing change, that massive price hike put them in a position to increase profits, even with less members..
But now that Netflix is splitting itself in two, I can guarantee you a sizeable chunk of people who were just happy with the dual plan will end up picking one or the other.
That being said, I like that they're tackling video games. They ought to take a serious look at getting into competition with Steam, which is making $1Billion in revenue and growing, with high profit margins.
If you think something of this scale was put together in a month, you don't understand how large companies work. This has to be in the works for atleast 4-5 months. The press likes to construct these action->reaction narratives (Foo launches Bar in response to company X doing Y yesterday) but in reality, these things take time and are rarely direct responses to events.
Steam doesn't rent games, which is what I believe qwikster intends to do. It's gamefly they would be competing with. If I were gamefly, I'd be very worried right now.
May be they could've locked the old price for existing customers (or given a steep discount on the new price), and only apply the increased price for new customers? That could stop the hemorrhage in the short/medium term.
This is not something you see CEOs write every day. Hell, this isn't something you see CEOs write ever in their careers. It took a lot of guts to write it, and regardless of the huge controversy surrounding their pricing strategies, I hope that this split succeeds.
If Netflix/Quikster can get games right, Gamefly should get pretty scared. They can't afford to keep large stock (so you often don't get the game you want), and their turnaround on games is poor (usually about a week round trip, and I live in CA where they have a distribution center).
Oddly, Gamefly just launched a streaming service for the PC, so just as Gamefly is beginning the move away from discs to streaming, Netflix is moving right into that spot.
I don't think game discs have much of a long-term future, but then neither do movie discs either. I wonder if this structuring is not just so that Quikster can be killed or sold to a chump (or someone willing to settle for scaling back the business) as soon as they begin to see the tipping point on streaming.
I'd believe it more if he wasn't writing the apology off the heels of his company losing 50% over a two month period & 25% within the last two trading days.
I don't think his crocodile tears now are going to win many people back, nor do I think his apology will have any effect on NFLX's course of action. Promising better communication but not having all the facts about how your spun off service is going to work doesn't lend much credit to his original apology. They should be bending over backwards to make sure that customers who are affected will have an easy transition. Though if this is a move to jettison those customers off onto a 3rd party buyer, then this will have been nothing more than Hastings proving he's a hypocrite.
Qwikster is a joke and will be dead or acquired in 5 years.
And Netflix streaming is not ready to carry Netflix forward. We won't be subscribing to Qwikster, and we're already looking for alternatives on the streaming side -- most likely, Amazon, who would never do something this idiotic.
While they seem to be going to great pains to be genuine and upfront about what they're doing, why does Netflix need to create a separate company in order to innovate? Apple doesn't have a separate Mac and iPhone business and they seem to innovate just fine.
What really seems to be going on is that Netflix is getting ready to spin off its DVD business. That this seems so obvious makes the repeated apologies feel like an insult to our intelligence.
As Reed says, the streaming business is global, but the DVD business is US-only. Maintaining code that services functions that apply in some locales but not others will slow down Netflix's ability to innovate.
May be this is the wrong decision, may be it is the right decision - it is quite unclear and only time will tell. However, from an entrepreneurial perspective, Reed has all my respect - it is incredibly difficult to disrupt yourself and he has certainly placed his bet. That takes balls and I respect that.
As to why separate, I assume that from an operational perspective it makes running the businesses easier. It is strange that some things e.g. ratings, accounts, etc. will be separate though, that's for sure.
To me, the classiest thing about this post is how Hastings is taking the time to personally respond to the blog comments. You don't see that very often from a CEO of a company as large as Netflix, and it's pretty darn cool.
I really, really liked the way Hastings wrote this post. It takes a lot to own up to your mistakes, but he seems dedicated to making Netflix succeed, and the decision to split the service into two is really... interesting, to say the least. I'll probably stick with streaming and forget about physical media, to be honest. It's much more convenient to drive to the Redbox down the street than wait a few days and have to deal with mailing discs back and forth.
Kind of glad to see video game rentals coming; too bad they're late to the party and will have to compete with Blockbuster, Gamefly, and Redbox.
Kind of glad to see video game rentals coming; too bad they're late to the party and will have to compete with Blockbuster, Gamefly, and Redbox.
All of these services have trouble. Blockbuster has a tarnished name (and I personally have never used the service), Gamefly has poor turnaround time and stock, and Redbox has awful stock and a high price.
Netflix/Quikster have been in a prime position to totally disrupt this for years. That they haven't pounced on it sooner has always been odd to me. It's like they consciously decided not to make money.
He's not "owing up", that's pure PR. This was hatched back in May, and it was stupid then, stupid now, and will be stupid 5 years from now when what's left of Qwikster is sold off in a fire sale and Netflix shareholders start wishing they had bought Yahoo!
I love Netflix. And so my following criticism is intended to be constructive. The email and blog post that Reed sent out today starts off well...
"I messed up. I owe everyone an explanation........I’ll try to explain how this happened."
However, after writing the above, Reed doesn't really give an explanation, and based on my colleagues' and other commenters' reactions so far, it seems to have come off as a smug non-apology. Rather than a wordy but empty-ish post, what you should have written about the overall price increases was a simple explanation at how your sourcing costs have increased. You might think that since that information is public, and geeks like us already know about it, but the majority of your customers might not be as news-savvy. And on the DVD side, explain to your customers some of the challenges that you are facing there, how they have become different from the streaming side, and why you needed to separate the businesses. (I personally don't really understand this one - the only reason I can think of for the clean separation is if you wanted the option to sell off one of the businesses later).
I believe people would have been more sympathetic had you given a simple, honest explanation of your challenges, especially after starting your post like that.
I was skeptical of this move at first, but I think the argument is fairly sound. I think a lot of commenters are focusimg on the technical aspect of the service and I agree, Hastings is being disingenuous when he says "they're two totally different businesses". What I think makes a sound argument is that they require a separate marketing approach.
Streaming is only a separate business model insofar as there are fewer degrees of freedom because of the studios; otherwise it's just a difference in how you deliver data. But that difference could be important from a marketing perspective. As Netflix pushes the streaming model, they risk damaging the DVD business by association. So it may be better to rebrand DVD business and carry it forward with a message concentrated around its (rather massive) benefits. That move is even more important if streaming becomes more competitive im the near future; war between cable companies, studios and streaming companies seems pretty likely, so the streaming space may become even more dangerous even while the conflict extends the life of DVD delivery.
So yeah, probably about as sound as a business decision can be. It may not work out but that's not guaranteed avoidable under the old setup either.
I have to say, I think they blew it with this one. Spinning DVD-by-mail off into a separate business might make sense, but I just don't get splitting the ratings/suggestions up by not integrating the services. Considering that one of Netflix's greatest strengths is the (very good) rating system this is a questionable decision, and I think they'll catch a lot of heat for it from the crowd that maintains accounts on both services.
This move is uncomfortable but necessary. The two businesses are different at every level (supply chain, cost structure, technology, user experience, etc.), and the DVD business is on its way out over the nest 3-5 years.
Better to disrupt yourself now than wait for some upstart to do it and react.
As long as they are splitting the company, why not in three pieces, with a separate movie rating/recommendation service? That way both the separate DVD rental business and the streaming business could make web service calls to the recommendation service. As long as people "joined" their identities on Quickster and Netflix streaming, then customers of both services get better recommendations.
The "third company" might also make revenue from additional companies wanting a high quality recommendation system. Doing recommendation well is very difficult.
I can't see how this is a good decision. Their streaming service is cheap but lacks titles. I use DVDs to get the shows and movies I can't get from the streaming service.
Obviously streaming is the future but the DVD part generates profits. The streaming only service - if it truly stands alone - is soon going to be competing with Amazon, Google, and Apple but without as much cash as these companies.
With their stock's price drop maybe Google or Apple will be willing to buy them. I don't see them surviving on their own without being bought out.
I think the challenge for Netflix here will be to disassociate Netflix with DVD rentals. People will go to Netflix's website, and expect their DVDs to be there alongside their streaming movies.
When I think of the term Netflix, I think of watching flicks on the Internet. I'm sure a lot of people don't look at it that way, but the term Netflix makes a lot of sense when referring to a streaming service (as opposed to a service that rents out physical media).
I know a lot of non-savvy people probably can't make that connection, but I think the company will make it clear that Netflix is no longer the place for DVDs.
Current Netflix DVD+streaming customers will seamlessly have Netflix+Qwikster accounts. Those who care about just DVDs or just streaming would probably have already left or already transitioned to the appropriate Netflix account option which would leave them with a Netflix or Qwikster account in the end, no action on their part.
So how would this move motivate anyone who hasn't already left to look at other services? I've seen other people on HN complain about needing to maintain two accounts, but switching to Hulu+Redbox has that same downside, removing that as a motivating factor to look at those options. Switching to just one has the downside of losing recommendations and setting up a new account. I don't see why anyone who hasn't already left Netflix after the pricing changes would leave because of this decision.
Roll out an "Import my recommendations" API integrated with IMDB and Amazon and Qwikster and other rateable sites, and you might have no trouble. Otherwise this is a very serious regression.
The customer wants one interface to rule them all, not to care about the leaky parts within.
For the next trick, sawing the millions of babies in half...
Renting out DVDs is a different business model and one that will be obsolete in 2-3 years. Putting DVD rental prepares them for a future where they can fade out or sell the DVD business and go abroad with a simple offer for the Netflix brand.
I'd be okay with a two-tiered system: a Netflix Light that is cheap and ad-supported (hopefully at the beginning, not interspersed throughout), and a Netflix Full that offers no ads.
Mostly though, I just want to have a decent selection in Canada. I was chatting with a friend about the possibility of doing a movie streaming startup, and I couldn't get past the fact that Netflix's biggest problems are not of their creation; they come from the studios. I wish them the best of luck, and hope that someday I might be a customer, but I'd hate to have to deal with the rights hassles that they do.
[+] [-] DevX101|14 years ago|reply
I'm trying hard but can't see the upside to this move. And I think this will cause a big hemmorhaging in profit for the short/medium term. Netflix has 12 million members that are on both the DVD and the streaming plan. These are the folks that got the 60% price hike. Although Netflix lost some customers (~5%) after the pricing change, that massive price hike put them in a position to increase profits, even with less members..
But now that Netflix is splitting itself in two, I can guarantee you a sizeable chunk of people who were just happy with the dual plan will end up picking one or the other.
That being said, I like that they're tackling video games. They ought to take a serious look at getting into competition with Steam, which is making $1Billion in revenue and growing, with high profit margins.
[+] [-] sriramk|14 years ago|reply
[+] [-] 0x12|14 years ago|reply
But the upside for netflix is those people that end up picking both.
The time to analyze this is 6 months from now when the figures are in.
My personal best guess about what they're about to do is sell off the DVD division.
[+] [-] Hostile|14 years ago|reply
[+] [-] brown9-2|14 years ago|reply
[+] [-] vijayr|14 years ago|reply
[+] [-] unknown|14 years ago|reply
[deleted]
[+] [-] flyosity|14 years ago|reply
Also, video games!
[+] [-] Lewisham|14 years ago|reply
Oddly, Gamefly just launched a streaming service for the PC, so just as Gamefly is beginning the move away from discs to streaming, Netflix is moving right into that spot.
I don't think game discs have much of a long-term future, but then neither do movie discs either. I wonder if this structuring is not just so that Quikster can be killed or sold to a chump (or someone willing to settle for scaling back the business) as soon as they begin to see the tipping point on streaming.
[+] [-] nl|14 years ago|reply
[+] [-] MartinCron|14 years ago|reply
This has the potential to be pretty large, actually, and GameFly is pretty terrible, in my experience.
[+] [-] Klinky|14 years ago|reply
I don't think his crocodile tears now are going to win many people back, nor do I think his apology will have any effect on NFLX's course of action. Promising better communication but not having all the facts about how your spun off service is going to work doesn't lend much credit to his original apology. They should be bending over backwards to make sure that customers who are affected will have an easy transition. Though if this is a move to jettison those customers off onto a 3rd party buyer, then this will have been nothing more than Hastings proving he's a hypocrite.
[+] [-] foobarbazoo|14 years ago|reply
And Netflix streaming is not ready to carry Netflix forward. We won't be subscribing to Qwikster, and we're already looking for alternatives on the streaming side -- most likely, Amazon, who would never do something this idiotic.
[+] [-] vaksel|14 years ago|reply
[+] [-] pyrmont|14 years ago|reply
What really seems to be going on is that Netflix is getting ready to spin off its DVD business. That this seems so obvious makes the repeated apologies feel like an insult to our intelligence.
[+] [-] male_salmon|14 years ago|reply
[+] [-] deyan|14 years ago|reply
As to why separate, I assume that from an operational perspective it makes running the businesses easier. It is strange that some things e.g. ratings, accounts, etc. will be separate though, that's for sure.
I can't wait to see this play out!
[+] [-] lazerwalker|14 years ago|reply
[+] [-] Vexenon|14 years ago|reply
Kind of glad to see video game rentals coming; too bad they're late to the party and will have to compete with Blockbuster, Gamefly, and Redbox.
[+] [-] Lewisham|14 years ago|reply
All of these services have trouble. Blockbuster has a tarnished name (and I personally have never used the service), Gamefly has poor turnaround time and stock, and Redbox has awful stock and a high price.
Netflix/Quikster have been in a prime position to totally disrupt this for years. That they haven't pounced on it sooner has always been odd to me. It's like they consciously decided not to make money.
[+] [-] foobarbazoo|14 years ago|reply
[+] [-] tsycho|14 years ago|reply
I love Netflix. And so my following criticism is intended to be constructive. The email and blog post that Reed sent out today starts off well...
"I messed up. I owe everyone an explanation........I’ll try to explain how this happened."
However, after writing the above, Reed doesn't really give an explanation, and based on my colleagues' and other commenters' reactions so far, it seems to have come off as a smug non-apology. Rather than a wordy but empty-ish post, what you should have written about the overall price increases was a simple explanation at how your sourcing costs have increased. You might think that since that information is public, and geeks like us already know about it, but the majority of your customers might not be as news-savvy. And on the DVD side, explain to your customers some of the challenges that you are facing there, how they have become different from the streaming side, and why you needed to separate the businesses. (I personally don't really understand this one - the only reason I can think of for the clean separation is if you wanted the option to sell off one of the businesses later).
I believe people would have been more sympathetic had you given a simple, honest explanation of your challenges, especially after starting your post like that.
[+] [-] Hyena|14 years ago|reply
Streaming is only a separate business model insofar as there are fewer degrees of freedom because of the studios; otherwise it's just a difference in how you deliver data. But that difference could be important from a marketing perspective. As Netflix pushes the streaming model, they risk damaging the DVD business by association. So it may be better to rebrand DVD business and carry it forward with a message concentrated around its (rather massive) benefits. That move is even more important if streaming becomes more competitive im the near future; war between cable companies, studios and streaming companies seems pretty likely, so the streaming space may become even more dangerous even while the conflict extends the life of DVD delivery.
So yeah, probably about as sound as a business decision can be. It may not work out but that's not guaranteed avoidable under the old setup either.
[+] [-] ryansloan|14 years ago|reply
[+] [-] jfarmer|14 years ago|reply
Better to disrupt yourself now than wait for some upstart to do it and react.
[+] [-] maaku|14 years ago|reply
[+] [-] waterlesscloud|14 years ago|reply
Heck, they sell lingerie and organic tea at the same time.
[+] [-] rachelbythebay|14 years ago|reply
[+] [-] whatusername|14 years ago|reply
[+] [-] mark_l_watson|14 years ago|reply
The "third company" might also make revenue from additional companies wanting a high quality recommendation system. Doing recommendation well is very difficult.
[+] [-] yequalsx|14 years ago|reply
Obviously streaming is the future but the DVD part generates profits. The streaming only service - if it truly stands alone - is soon going to be competing with Amazon, Google, and Apple but without as much cash as these companies.
With their stock's price drop maybe Google or Apple will be willing to buy them. I don't see them surviving on their own without being bought out.
[+] [-] Jarred|14 years ago|reply
[+] [-] Vexenon|14 years ago|reply
I know a lot of non-savvy people probably can't make that connection, but I think the company will make it clear that Netflix is no longer the place for DVDs.
[+] [-] kariatx|14 years ago|reply
http://twitter.com/#!/Qwikster
[+] [-] nosequel|14 years ago|reply
[+] [-] ctingom|14 years ago|reply
[+] [-] ryannielsen|14 years ago|reply
Current Netflix DVD+streaming customers will seamlessly have Netflix+Qwikster accounts. Those who care about just DVDs or just streaming would probably have already left or already transitioned to the appropriate Netflix account option which would leave them with a Netflix or Qwikster account in the end, no action on their part.
So how would this move motivate anyone who hasn't already left to look at other services? I've seen other people on HN complain about needing to maintain two accounts, but switching to Hulu+Redbox has that same downside, removing that as a motivating factor to look at those options. Switching to just one has the downside of losing recommendations and setting up a new account. I don't see why anyone who hasn't already left Netflix after the pricing changes would leave because of this decision.
[+] [-] rhizome|14 years ago|reply
[+] [-] jobu|14 years ago|reply
[+] [-] msg|14 years ago|reply
The customer wants one interface to rule them all, not to care about the leaky parts within.
For the next trick, sawing the millions of babies in half...
[+] [-] demoo|14 years ago|reply
Renting out DVDs is a different business model and one that will be obsolete in 2-3 years. Putting DVD rental prepares them for a future where they can fade out or sell the DVD business and go abroad with a simple offer for the Netflix brand.
[+] [-] zoowar|14 years ago|reply
[+] [-] elq|14 years ago|reply
[+] [-] redthrowaway|14 years ago|reply
Mostly though, I just want to have a decent selection in Canada. I was chatting with a friend about the possibility of doing a movie streaming startup, and I couldn't get past the fact that Netflix's biggest problems are not of their creation; they come from the studios. I wish them the best of luck, and hope that someday I might be a customer, but I'd hate to have to deal with the rights hassles that they do.