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  • irishtimes.com - Posted: September 23, 2011 @ 3:02 pm

    The Netflix Way

    Davin O'Dwyer

    The announcement last Sunday that Netflix was to separate the DVD rental-by-post business that made it famous from its movie downloading business generated all sorts of criticism in the US tech press and blogosphere, and not just because the new name was the palpably lame moniker Qwikster (isn’t that a chocolatey powder drink?).
    It’s not hard to see why everyone got so riled – chief exec Reed Hastings published a lengthy blog post trying to explain the thinking behind July’s decision to charge for Netflix’s movie downloading and DVD rental business separately , rather than the attractively low, bundled price it had previously been. But instead of explaining that, Hastings actually introduced further inconveniences to the service: “A negative of the renaming and separation is that the Qwikster.com and Netflix.com websites will not be integrated,” he wrote. For Netflix customers, not only were they being charged more, but the service just got worse.
    Now this is of merely academic interest to Irish film-lovers – Netflix is North American only, unfortunately – but what is of interest is Hastings’ rationale for focusing on streaming and separating the two sides:
    “For the past five years, my greatest fear at Netflix has been that we wouldn’t make the leap from success in DVDs to success in streaming. Most companies that are great at something – like AOL dialup or Borders bookstores – do not become great at new things people want (streaming for us) because they are afraid to hurt their initial business. Eventually these companies realize their error of not focusing enough on the new thing, and then the company fights desperately and hopelessly to recover. Companies rarely die from moving too fast, and they frequently die from moving too slowly.”
    Now this is just common sense – DVD by mail might be a lucrative business now, but it’s obviously a dead dodo walking, with a “best before date” looming in the next five to 10 years. And there are plenty of pundits out there suggesting alternative motivations behind the split (studios demanding per-subscriber payments, possible takeover by Amazon, yada yada yada).
    But Hastings is articulating a critical business truism that is so rarely heeded – changing from one revenue stream to another revenue stream that will be more lucrative down the line often means harming the current cash cow. It’s a brave move, and such bravery is exceedingly rare in companies that are actually profitable – that’s why many operations only innovate and reinvent themselves when their backs are against the wall and their current revenue stream faces collapse, which is obviously a bad time to be reinventing yourself.
    There are plenty of examples of this phenomenon – Microsoft’s reliance on Windows and Office licensing has long acted as a major hindrance on its ability to innovate. Only now that Apple is reinventing personal computing with the iPad is Microsoft showing a willingness to change its ways with Windows 8 and Metro.
    And it’s not just the technology business that’s prone to this quandary – newspapers are in a similar position, trying to shore up their legacy paper operations while building digital platforms to carry them into the future. Needless to say, the past and the future aren’t comfortable bedfellows.
    So well done to Hastings for having the bravery to make this move, but there are more than a few people who think he might get to test his theory that “Companies rarely die from moving too fast”.

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