On the Brilliance and Stupidity of Splitting

October 24, 2011 § Leave a comment

I’m a little late to the game with this post, but I had an interesting conversation with my buddy David Gleich, so I wanted to put this up.  When I first heard about Netflix splitting its DVD and Instant Watch services into two different business entities, I thought it was a brilliant  idea. It looked to me as another example of Netflix taking the lead and innovating in the media distributing business. Their two distribution channels are very, very different even though they aim to deliver similar content. So why keep them tied to each other when the only thing that they really have in common is whether or not the user has already seen the content? Everywhere you look there were good reasons to go through with the split, and in all honesty I can think of only a few reasons not to proceed, and only one I actually cared about.

By separating the two services, each new business unit would have been able to more aggressively pursue new opportunities and experiments in both content acquisition and innovative business models at the cost of a little bit of extra work for customers using both services. Even after the price hike (which was totally reasonable and people who jumped ship and rose up in protest can’t wrap their heads around the fact they were drastically underpaying for the service), I loved Netflix and was getting excited about all the possibilities for them.

A House of Cards is Stronger than You Think

Doubling down on a Netflix production studio or even partner with an existing one is an amazing opportunity. They are working on House of Cards, but I’d love to see Netflix do some more content. Being a big fan of Dr. WhoTorchwood, and a number of other British tv shows, I have come to appreciate the short series. Torchwood season three was only five episodes, but was masterfully done. Jekyll was another miniseries that was only six episodes, but managed to be quite entertaining. If Netflix were to put out two or three mini series a year as exclusive content only available on Netflix, that could be a huge draw. Not a huge investment in any single story line, with ability to bring them back the following season if they are successful. I’d love it if Netflix turned into a variation of HBO, Showtime or Bravo that did short form TV. Imagine if the only place you could watch the new episode of True Blood was on Netflix every week… This path is my personal favorite.

The Hulu+ Experience

While it is very nice to not have to watch commercials, I could see a subsidized plan that factors in limited commercial breaks being a possible success.  I mean come on, Hulu makes us pay for Hulu+ and still runs ads during the normal commercial breaks.

Slice and Dice and Serve it Up

There are an untold number of ways Netflix could slice up their content and charge for it. Charge extra for HD.  Have a plane that only has access to movies. Another one that has access to TV only. A third that is movie and TV access. Charge a premium for early access to new releases. Netflix could even spilt up access to the content based on who is licensing it to them.  What about and HBO, Showtime and Bravo only TV package? Or a NBC and Fox one? I know I’d love to have access to a greater variety of SyFy’s programming. Now I’m not saying that I would enjoy it if they started doing some of these, I’m just throwing them out there as possibilities. And as unlikely as they maybe, these pricing strategies aren’t even on the table as possibilities while the DVD’s are a part of the package.

The DVD rental business would have had the same opportunities. Charging more for BluRays doesn’t have anything to do with my streaming usage. Throwing video game rentals in there as it has been said they are planning, doesn’t really jive with Instant Watch.

When it comes down to it, the only thing that these two business really need to share is a queue and a ratings system, but Netflix had said they were going to be splitting the two systems up and not share any data between them. This was really my only complaint. I have spent a fair bit of time rating over a thousand items on Netflix. I would be less than happy if I had to start maintaining multiple ratings databases.

And that was a nice lead in for the reason I actually first thought write this post.

Monetize the Platforms

David mentioned the advantage that Netflix over its competitors early on was its ability to turn around DVDs. Get them back from a customer and get them back out to the next one waiting. With the streaming and DVD sides of the business separated, the DVD side could put some effort and monetizing one of its greatest assets, it distribution and logistics know how. Much like Amazon has Fulfillment By Amazon, Netflix could easily do somethign like Rentals By Netflix. Other companies could out source the logistical part of turning around rented items. They could start with the form factor they know best, DVDs and CDs and expand from there. Amazon has pioneered the way for them and has proven you can be successful being this type of platform.

Interesting side thought, what is the breakdown of DVDs on the shelf, being processed, in transit to the customer and in the customers’ hands? Ideally you’d want to optimize your processes to drive the percentage of stock on the shelves down to near zero by having enough demand to send out a DVD once it has been returned. Turn around time is probably bottlenecked by pick and delivery times of the USPS, so optimizing that process increases throughput but only decreases turn around time to a point. Transit time is more or less fixed around two days, so all that really varies is how long a person holds on to the DVD. Netflix would obviously like to have the user hold on to the DVD as long as possible to drive down postage costs. Anyways, just a side thought, nothing really going on.

The commoditization of the logistics of DVD rentals and how much I would have disliked having my ratings separated between streaming and DVDs got me thinking about another opportunity Netflix misses out on. Turning their recommendation engine into a service and selling access to their curated datasets. Their recommendations are the best on the web as far as I am concerned. I trust when Netflix says that it thinks I would give something 4.1 stars, that I will enjoy it. I do not have nearly the same confidence in a book or movie when Amazon suggests in my personal recommendations. By spinning this out into a separate service, both my Instant Watch and DVD queues could have benefited from it. They could even do deals with other video services to provide recommendations for them. Would I like Hulu better if my Netflix recommendations were integrated into it guiding me though its offerings? Absolutely. And it doesn’t have to stop with movies and TV shows. I would love it if Netflix could use its recommendation engine to suggest books to me on Amazon. They have been adding and refining it over the years and have committed a lot of money to it through things like the Netflix Prize. Put together an API for categorizing objects and adding user ratings, and you’ll have startup beating down your door to use algorithms on their datasets.

Naming Conventions

Even though I was getting really excited about all that could have happened, Netflix demonstrated some good old fashion stupidity with the way they went about it. The only thing I’ll say about the name is that it was obvious that they didn’t focus group test it. It would never have passed the mid 20’s demographic.

Split Then Raise

I also wonder if it might have been a better plan to split the two services first and then do the price hikes. The way they did it, the customers got mad and then forcing them to sign up for a new site would have been a recipe for an even bigger churn than they saw. If they had gotten the switch done first and then after the users were settled, hiked the prices, people who probably have been less inclined to leave.

One is Better than Two

I wouldn’t mind two different services, but the I would, as mentioned above, mind having to duplicate my efforts in rating movies and shows and maintaining a queue. Netflix should have foreseen this problem. Nothing about this part of the plan should have been able to get through early exploratory conversations. There had to have been ways around it that would have been feasible.

Anyways, this has been a fun little thought exercise, but it has gone on quite long enough. In conclusion, I think that Netflix has missed out on a very big opportunity here.  They flashed a glimpse of some true brilliance only to quickly hide it under a blanket of stupidity.

I truly believe this is one instance where the total is going to be far less than the sum of the parts.

Update 10/24

Looks like Netflix blew their earnings and took a 25% nose dive in after hours trading. Suck.

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