Back in February, I asked the question about the (long-term) sustainability of Netflix’ business model and I guess that some major events in Netflix’ life over the past week have provided some useful insights into answering that question:
- Splitting the company in two – On the Netflix blog, Netfox CEO Reed Hastings last week announced the split of the business into two separate parts. Netflix’ traditional DVD-by-mail business will be renamed Qwikster and the name Netflix will be retained for the company’s streaming activities.
- It’s not a spin-off – In his blog post, Hastings made it clear that both businesses remain part of the same company. However, Netflix has come to the realisation (albeit a bit slowly so it seems) that DVD-rental and streaming are two very different activities. Hastings explains: “So we realized that streaming and DVD by mail are becoming two quite different businesses, with very different cost structures, different benefits that need to be marketed differently, and we need to let each grow and operate independently.”
- Different brands, charged separately – Netflix’ recent price hikes meaning that its customers now have to pay separately for streaming and DVD rental (as opposed to paying a ‘package price’) caused quite a massive uproar and a decrease in the number of Netflix subscribers (and a significant share price drop to boot). I guess Netflix execs must have felt that to fully justify this price increase it had to package up both products separately, each with their own website, mobile platform, etc.
- Streaming is the future – To me, this split clearly shows that Netflix sees online streaming of content as its future. In his blog post, Hastings acknowledges that the days of DVD rental are numbered: “DVD by mail may not last forever, but we want it to last as long as possible.” One can imagine that in the not so distant feature Netflix will sell its DVD rental business (or terminate, depending on customer demand) and concentrate solely on its streaming business instead.
- Will Lovefilm follow suit? – Lovefilm which recently got acquired by Amazon is increasingly focusing its efforts on streaming. The Lovefilm Player is a good example of this strategy, streaming video content directly to users’ TV sets or game consoles.
- Content streaming is the way to go – In the past few days the ‘new Netflix’ has been announcing a video-on-demand rights deal with major Hollywood studio DreamWorks to beef up its content portfolio. Not only is this a logical step in Netflix’ ongoing quest to stream content across multiple platforms, moves like this one are critical if Netflix wants to gain a strong foothold in the content streaming market.
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