In Defense of Netflix

21 September 2011 by Matthew Gertner - Category: Rants and Ruminations

According to investment blog Seeking Alpha, Netflix is going to lower fourth quarter guidance because, among other things, “Everybody hates the split of the brand into Netflix and Qwikster.” A couple of web comics, Oatmeal and The Joy of Tech, rip into the company even more mercilessly. Press coverage has been almost universally negative. This after its stock has taken a brutal battering in the past few days, plummeting over 40%.

As the pundits would have it, Netflix is a basket case run by a bunch of nincompoops who can barely dress themselves in the morning, let alone run a fast-growing media company. The funny thing is until a couple of months ago, they were perceived as having some of the savviest top management in Silicon Valley. This was reflected by their success in a cutthroat market, with nearly 30% of total internet traffic (yes, you read that right) attributable to their streaming service.

So how did Netflix go from superstar to pathetic loser almost overnight? The answer is simple: they didn’t. They are continuing to execute brilliantly in a market littered with dismal failures among both incumbents and hype-fueled startups. Their recent pricing changes and even more recent split into two companies (one for DVDs and one for streaming) is hardly a refutation of this brilliance. It’s a symptom of it.

The irony is that the same digerati who constantly mock Big Media for failing to “get it” are the first to bash Netflix when they demonstrate that they do. The DVD-by-post subscription service was an exceedingly clever and well-executed hack. Sending a bunch of bits back and forth on a clunky disk is slower, more expensive and more wasteful than streaming, but it got around the lack of bandwidth and the thorny copyright issues that existed when the service was launched. Needless to say, it’s been a stunning success, and a lesser company would cling to it for dear life. Eventually some nimble startup would eat their lunch with a modern digital delivery service unburdened by a legacy DVD business. Everyone would laugh at how the hidebound former market leader had failed to adapt.

But Netflix has done everything right. They’ve separated the two services and prepared for a time in the not too distant future when DVDs will be obsolete. The stock movements mean nothing except that the normal myopic herd mentality of day traders and institutional investors continues to reign supreme (and as a newly minted shareholder, I thank them). As Andy Grove would say, Netflix has reached an inflection point and has rightly focused on where the market is going, not where it is today. They deserve praise, not mockery, for having the foresight and courage to avoid the trap that the vast majority of successful companies succumb to.


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COMMENTS
  • http://tancast.com/ Mysterious Andy

    Which do you think is more ubiquitous in Netflix’s (former?) target market: broadband and appropriate set-top-boxes or DVD players? If the latter, how long do you anticipate it will be before shipping DVDs through the mail is no longer a profitable business?

    You’re also ignoring that fact that, at least in the here-and-now, there are features (like access to good, recent films) which the “future” side of their business lacks but the “hack” side of the business has in spades.

    There are also the myriad customer benefits stemming from the (I shudder to use the word) synergies between the two lines of business that they are now, perhaps cavalierly, throwing away. Maintaining a single set of ratings, seeing offerings from one set in the other queue (“Oh, I can stream that movie in my DVD queue right now?”), and even just having one account on one site to remember; all about to go the way of the dodo or BeIA.

    I agree that they cannot afford to stand still, and there is always the chance that 3 weeks from now Netflix announces they have signed deals in place with every major movie and television studio, made possible only by their decision to exit the DVD/BD-by-mail business.

    Until and unless that happens, though, this seems like betting the farm while burning the stables.

  • Guest

    I have to echo what Mysterious Andy said. Of course, sending DVDs is a “hack” but I don’t think it’s a hack in the way you describe it. It’s not a technological hack it’s a copyright hack.

    If I want to watch Harry Potter through Netflix in the next year either Netflix has to sign a deal with Warner Bros to give them the rights to stream it (very unlikely) or they have to buy physical DVDs/Bluray on the open market and use their first-sale doctrine rights to send it to me in the mail. There is no reason not to stream content Netflix has access to–the days of the technological hack are over. But as a Netflix customer I need that copyright hack that allows Netflix to send me new releases.

    I don’t think the day of the DVD/Bluray is over. I think it will continue to exist because people will buy them precisely because they can be legally shared. And I think content companies will sell them as long as they make significant amounts of money even though they would much prefer to cut out manufacturing costs and have more exclusive control over their content by selling them online. Unless content providers are going to drastically lower the prices they charge for digital streaming rights then services like Qwikster, Redbox, etc. will thrive.

    What Netflix has done is turned its “rent almost any movie in the world” service into a “stream a large number of out of date and less popular films” and a “rent any DVD/Bluray that’s out there” service. They are splitting their service for exciting new releases and popular old films from their streaming service for films that they can get rights to cheaply.

    • http://www.salsitasoft.com Matthew Gertner

      That’s exactly what I said: “…but it got around the lack of bandwidth and the thorny copyright issues that existed when the service was launched.”

  • Erussell715

    As an employee of a competitor, it certainly looks to me like Netflix’s latest attempts to save customers is nothing more than a distraction. I didn’t like Netflix before I started working for DISH, and I would hate to have to deal with TWO separate entities to get the same content I now get through Blockbuster Movie Pass and DISH. With no hidden fees or price increases, I now have access to more than 100,000 titles, as well as thousands of movies by-mail and 20 additional TV channels. It’s the best option around, and while other companies seem to be separating their facets, DISH is bringing them all together!