Qwikster Cometh

· Joanthan Poritsky

The day has come. Netflix, the company whose iconic red mailer sleeves upended the home video business over the last decade, is getting out of the disc delivery business. In an honest and transparent message to customers today, CEO and co-founder Reed Hastings expressed regret over his handling of the company’s recent restructuring1 and announced that the disc-by-mail service will soon be spun off into a separate product known as Qwikster. Netflix proper will be a streaming only company.

It’s interesting to look at the timeline of how this transpired:

  1. July 12: Netflix announces pricing changes and restructuring in a blog post. The post was written VP of Marketing Jessie Becker, Netflix’s VP of Marketing.
  2. September 1: New prices go into effect.
  3. September 15: Netflix’s stock drops 15% with news that the company will lose roughly 1 million subscribers over the price hike, more than anticipated.
  4. September 19: CEO Reed Hastings apologizes for his silence during the pricing transition and announces Qwikster.

Make no mistake, this was the plan back on July 12 when the changes were announced:

Reflecting our confidence that DVDs by mail is a long-term business for us, we are also establishing a separate and distinct management team solely focused on DVDs by mail, led by Andy Rendich, our Chief Service and Operations Officer and an 11 year veteran of Netflix.

It’s clear from the timing of these events that this plan had already been prepared. Instead of stepping backwards and changing the pricing structure again, Hastings pushed the company forward, drastically. Netflix doesn’t want consumers to associate its name with plastic discs anymore. The original announcement said as much, but consumers didn’t understand the message. Now they do.

I don’t know much about the internals of the company, but I wouldn’t be surprised if Hastings wanted to spin their disc-by-mail service off all long. Perhaps that’s why he was relatively hands off as the September 1 transition loomed; “Plan A” was a compromise, but the Qwikster plan was always what was going to work.

As to what this means for home video, I think that both Netflix and Qwikster have an uphill struggle from here on out, the latter especially. For one, anyone who was on the fence about keeping a disc-plus-streaming plan now has added obstacles to overcome. Billing, film ratings and queue management will have to be handled completely separately for both services. I let my one Blu- ray plan lapse into the new pricing and I suspect many Netflix subscribers did as well. Having to set up and manage an entirely new service gives me pause. Why not set up camp elsewhere?

As for Netflix’s streaming only? It is bogged down by a number of issues today. The barrier to entry is still high. In order to get streaming video on your television, you need both a broadband connection and a set top box (Roku, AppleTV, Blu-ray player, game console , etc.) or Netflix compatible television. Even assuming one has the equipment to play streaming video, customers still have to pay their Internet Service Provider on a monthly basis. On the disc side of things, the player is simply a one-time purchase.

Netflix’s biggest hurdle for streaming has always been the content deals it can broke in Hollywood. In today’s blog post, Hastings alluded to “substantial” new content deals that will be announced in the coming months. The elephant in the room is Starz, who announced that it will pull its content from Netflix in February when their current contract lapses. Starz represents about 8% of Netflix’s current streaming slate.2 As studios get their own feet wet in the streaming game3 they have grown lukewarm to the idea of licensing to Netflix. Today, Netflix’s Watch Instantly selection is not comprehensive enough to make it the only choice for a lover of media. We’ll have to wait and see what content deals Hastings is teasing.

For now, I’m going to stick with Netflix and I’ll see about Qwikster once it goes live. Consumers certainly have a right to be frustrated. It’s very rare you’ll see a company make a move this risky after news that they are losing customers in droves. This is certainly the biggest shift in the company’s history. We’ll see how it turns out.

  1. Better known as the “price hike.” ↩︎

  2. Remember, though, that Starz’s content probably represents a much larger percentage of what people actually watch. ↩︎

  3. See: HBO Go, Hulu, EPIX (Okay, not all great examples, but studios are trying.) ↩︎