Published on: September 21, 2011
There has been much criticism of the controversial Netflix decision to split the company’s brands in two - using the Netflix name for its streaming service and inventing a new “Qwikster” brand for its DVD rental service, a move that itself followed a price increase that annoyed customers and caused up to a million subscribers to abandon the service.Slate.com
, however has a defense of the strategy - albeit a half-hearted defense, since the piece also says that the decision was “idiotic” because it essentially drew a distinction between two kinds of video usage when, in the consumers’ mind, there is no difference.
However, the piece suggests that Netflix CEO and co-founder Reed Hastings may have been reading “The Innovator’s Dilemma,” by Clayton Christensen, which in 1997 focused on “the ways that successful companies die at the hands of upstarts,” which develop disruptive technologies and business models. It is a focus to which Hastings would be sympathetic, since Netflix itself disrupted a traditional video rental model developed by Blockbuster. “Hastings is likely paranoid, then, that Netflix is vulnerable to the same kind of disruption,” Slate
posits. “And that's the logic behind the mail/streaming separation. Hastings would prefer to kill his own golden goose before anyone else beats him to it.”Slate
offers the following defense:
“It could work. In ‘The Innovator's Dilemma,’ Christensen argues that the companies that are most vulnerable to disruptive technologies are those that have really good
management. The problem with good managers is that they tend to listen to customers. And the problem with customers is that they don't always know what's best for them. If you were a devoted Blockbuster customer in 2001, and if Blockbuster's CEO sent you an email announcing he was closing all the company's stores and switching to a DVD-by-mail service, you would have balked. From now on you'd have to wait three days for a movie? You'd have to choose your movie on your computer—how would you do that when you didn't even have Internet service? You'd have to pay a monthly fee? What if you just watched one movie a month? All of this would have sounded like too much hassle.
“As Christensen explains, disruptive technologies usually start out as inferior substitutes, proving attractive only to a small fringe of customers. For years, the people who ran Blockbuster saw Netflix as irrelevant. It's easy to call them stupid now, but at the time they were mostly right. Blockbuster's customers considered Blockbuster better than all the alternatives; if they didn't, they wouldn't have been Blockbuster customers. And Blockbuster's managers were doing what good managers do - they were investing in the parts of the business that customers liked (opening more stores) rather than coming up with a whole new business that might alienate their current users.
“The key advantage of Netflix's new model is that it will give each side of the business —the DVD side and the streaming side—flexibility to manage its service in a way that pleases its own customers. As a combined service, any move to strengthen one side of the company over the other would have been perceived negatively by one group of customers. Netflix believes that its DVD shipments will peak in 2013; after that, as fewer and fewer people subscribe to DVDs, it's going to have to raise prices to support the physical infrastructure needed to ship out the discs. Now it will be Qwikster that will suffer the negative reaction to all future price hikes—and Netflix that will benefit from the customers getting rid of their DVD plans.”