In Defense of Netflix

What do you do if you run a highly successful company with two business lines; one extremely profitable but the other, not so much? Your customers still enjoy both products, but it’s increasingly difficult to advance the first if you have to keep pumping cash to sustain the second.

The obvious answer is, you get rid of the one that’s floundering and reinvest in the one that’s flourishing. Yes, there will be backlash from people who like the second, but you know that in the long term, it’s the right thing to do.

This is the exact situation confronting Netflix, a company that provides media through on-demand streaming services (boom) and DVDs through the mail (bust). Until recently. In a highly controversial decision, Netflix announced it is spinning off the DVD mail-in service to a completely different company called Qwikster. Netflix was qwikly reprimanded for the move, with critics disapproving of

• A name that resembles other startups that died off, such as Friendster and Napster
• A Twitter handle @qwikster that was already taken by someone who posts about taking a shower and getting stung by a bee
• A name that can easily be misspelled, which hurts brand recognition
• The second fee hike this year (only to the mail service, not to the streaming)

Could a savvy business man who brought the Blockbuster juggurnaut to its knees suddenly be so dim-witted to rebrand a business with a silly, childish name? Perhaps. Unless he was trying to kick Qwikster to the curb so he can focus on the other business line that he actually cares about.

Here’s my prediction: Qwikster will fail. Netflix will improve. To the point that people who love DVD by mail won’t care for it anymore because streaming will be sufficient.

Netflix’s biggest threat isn’t disgruntled users who huff and puff about fee hikes and inconvenient billing setups. Their biggest threat is competitors in the content streaming market. Big competitors with deep pockets and clear advantages.

• Hulu Plus offers TV shows a day after they air
• Amazon Instant is bundled with Amazon Prime
• Apple iTunes has its own software platform and hardware devices
• TimeWarner gets movies the same day as DVD releases
• Android Market is backed by internet giant Google
• Vudu, a streaming media company is backed by retail giant Walmart

Netflix’s advantage is in brand recognition and an already large customer base. But if it doesn’t improve its deficiencies soon, one of these other giants will overtake them with relative ease. They knew that if they had to keep sinking cash into a destructively expensive operation like mailing physical DVDs, where

• the cost of postage keeps increasing,
• the number of DVDs keep expanding, and
• the overhead costs never diminish

they’ll be sunk faster than you can say Alta Vista. But now that they put all their eggs into one content streaming basket, the likelihood of success greatly increases, despite the short term criticism from upset customers.
So was it the right move to ditch the DVD mail-in service? Definitely.

Can government learn something from this move? Obviously, government can’t get rid of important services just because it’s antiquated and incredibly costly to maintain. Government could save a lot of money if they closed down brick and mortar field offices and mandate citizens to conduct business online, but they can’t.

However, has government done a careful analysis of the cost-effectiveness of their programs? Yes, we have many performance measures and benchmarks, but do they translate to useful metrics that help us better manage our programs? In many cases, yes, but in many cases, probably not. Government still sinks way too much money into outdated, costly behemoths and not enough into newer, more cost-effective technologies. It’s certainly easier to talk about efficiency and effectiveness than to actually do it, but there are steps government can do to better manage how it allocates resources. We might be scornfully criticized in the short term, but in the long term, it might be the right thing to do.