Ever since Netflix revealed plans to increase the price of the streaming plus DVD plan, the company has been under a barrage of bad press, customer ire, subscriber losses, and falling stock prices. However, the much maligned price increase was going to come sooner or later. One of the criticisms of Netflix streaming is content. Some feel that the streaming service consists of older lower quality shows. I disagree, but it is true that content is king. And content, especially newer more popular programming, is expensive. For example, the original agreement with Starz, which is set to expire in February 2012, cost Netflix an estimated $30 million per year. To renew the deal, Netflix offered Starz $300 million per year, 10 times more than the previous agreement. And Starz still turned it down. Programming costs has gone up and will continue to rise. So It’s not realistic to expect the price for a combined streaming and DVD (which comes with its own set of overhead costs) service to remain unchanged. Could Netflix have handled the price hike better? Perhaps. But Netflix needed this to remain competitive.
That brings us to the Netflix split. The plan probably wasn’t just a simple knee jerk reaction to customer anger. Marc Randolph, co-founder of Netflix, said “Plain and simple, this move was all about focus. Relentless focus. A focus that has been deeply embedded in the Netflix DNA since day one.” Randolph, who’s no longer involved with the company, talked about a similar scenario that took place in Netflix’s early days, the decision to no longer sell DVDs:
“We sold a lot of DVDs. Bucket loads… It was inevitable that at some point in the near future we would have Amazon entering the DVD business. And then Walmart. And then just about every mass market retailer in the country. All of which would have crushed our margins and slowly but surely driven us out of business…Most importantly, by trying to run a business that did two things well, we inevitably were forced to make an endless series of compromises that resulted in us doing neither of them well.”
“By focusing on a narrower set of problems, it made engineering much more productive…And it paved the way for us to implement a process of rapid iteration and testing that ultimately uncovered the big innovations that ultimately led to the Queue, Unlimited Rentals, and No-Due-Dates-No-Late-Fees.”
Today, streaming is the future of Netflix, not DVDs. And with Amazon Prime and other streaming services on the rise, Netflix needs to focus solely on streaming. Splitting the services will allow that to happen. Maybe Netflix should’ve stuck to their guns on this one.
