The CEO of Netflix, Reed Hastings, just penned a blog post combining an apology for how they handled recent price increases and an announcement of a new company spinoff, “Quickster”, which will handle the DVD-by-mail service. The idea is that Netflix focuses on streaming and Quickster focuses on DVD by mail.
I know a lot of people are upset about the price increase (if you did both streaming and dvd by mail you will now pay more for what you used to get) but IMO Reed did the right thing. Why? He is absolutely correct that companies rarely if ever transition from one paradigm to another. For example, IBM did not successfully transition to the PC market (they no longer produce PCs) and traditional newsprint companies are struggling to succeed in the online world. The best example of all, Blockbuster, is struggling to stay out of bankruptcy.
Why do companies fail to make the transition? Because they must “eat their own children” i.e. they must sacrifice their existing customer base in order to grow the new one. And as you might guess, nobody likes eating their own children (ETOC).
Netflix is at a point where they must either ETOC, fail like the rest, or spin off the old business. Spinning off the DVD business makes the most sense to me. Quickster now gets to compete in the DVD market where it will experience a slow and gradual decline while Netflix can really focus on the exploding streaming business. What will be particularly interesting is that as these two companies further separate themselves, will Netflix have the courage to “take out” Quickster like they would want to eliminate Blockbuster?
That will be the moment of truth for Netflix. We’ll see if they will be willing to “eat their previous offspring” or not.
What do you think about the spinoff? Lets try to keep the comments off the rate increase as I would agree nobody would support it and there’s no point in ranting about something we all agree on (we don’t like rate increases!). I’d like to get some feedback on what you think about the business concept of spinning off Quickster vs. keeping it within Netflix.