Why Netflix Just Cut Itself in Half

Last night, Netflix CEO Reed Hastings took to the internet to explain why his company transformed its DVD business into (the unfortunately named) Qwikster. But here's why he really did it, what happens next, and why it matters.

What Netflix Didn't Do

There's been a lot written about the company's new structure, on this site and others. But it's still worth pointing out that while the barriers being erected between Netflix and Qwikster are iron-clad impenetrable for consumers, the two services are still very much part of the same company. For now, anyway. In non-streamable reality show terms: Netflix hasn't voted its DVD business off the island; they've just split it off into a different tribe. One that doesn't know how to make fire.

No, Netflix hasn't shitcanned DVDs; its DVD-only subscribers still number in the millions. And they didn't create Qwikster just to let it die a quiet death out in the desert; the addition of video games (which are much less streaming-friendly than seasons of 30 Rock) ensures that the service will stay relevant even after movies-on-discs are as outmoded as the gramophone.

Why Qwikster Happened

Let's be clear about this right now: Netflix didn't do this for you. This isn't a consumer-friendly move. In fact! You're either not going to notice it at all, or be briefly ticked when you have to enter separate change of address forms for both Netflix and Qwikster. This move isn't about Netflix's customers. It's about Netflix's survival.

It's an obvious point, but it's the one that matters: DVDs are becoming obsolete. But there's no mass extinction event to point to; it's a lugubrious death, a slothlike shuffling off. Some people will be renting DVDs by mail for years and years after it makes any sense, just like some people still have Aol email accounts and buy full-size camcorders and watch Grey's Anatomy. So why not keep making money off those people for as long as you can?

Think of it like this: sometimes you need to amputate, and sometimes it's better to quarantine. The DVD industry has the sniffles now, and Netflix is putting it into a hyperbaric bubble before it devolves into something terminal—and brings down its strapping young streaming lad with it.

There are two main benefits to cordoning off the mail service in the Qwikster ghetto. First, it keeps streaming customers shielded from the inevitable DVD price increases that will come with fewer subscribers and ever-increasing postal rates. And—maybe more importantly—Netflix is able to limit the constant reminders of all the movies that you can't add to your Instant queue. Streaming customers won't be able to see DVD availabilities any more, which means you won't get that feeling that you're staring at an unattainable ocean of truffles and bonbons with nothing but a Werther's Original in your hand.

There's also this point raised by Bill Gurley today: Netflix has this whole time been paying studios for streaming rights based on its total number of streaming subscribers, including those with streaming + DVD plans that never watched a movie online. By partitioning streaming and mail-order, Netflix can hand studios a more accurate picture of how many people are downloading their content—which will hopefully mean more favorable studio deals, and more options for your queue.

What Happens Next

Qwikster's a funny name, isn't it? Such a slapdash choice (so much so that Netflix didn't even bother securing the Twitter handle). That alone should indicate that the service isn't in it for the long haul. Not as part of Netflix, anyway.

This ends one of two ways: Netflix turns its Qwikster trial separation into a full-blown divorce, spinning off the company in its own entity and letting it live or die based on how many copies of Arkham City it can ship. Or Netflix finds a buyer for the service, one who's convinced that there's still money to be made in mailing shiny little frisbees to people and waiting patiently for those people to mail them back. Maybe Gamefly wants to expand its video game offerings to include movies. Maybe Blockbuster will look for solace in industry consolidation, like XM and Sirius did a few years back. Or maybe we spend the next decade using Qwikster as a series of data points, watching DVD vital signs wane until eventually the format flatlines.

Either way, here's what matters to you: by distancing itself from a loser, Netflix can focus on making its streaming business more of a winner. Which means better content, sooner, and more of it. That's the gamble, anyway. Let's hope it pays off; if not, we're all going to be stuck forever streaming Snake Eyes.


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