Netflix spinoff isn’t about costs or diversification, it’s about a future without discs

The spinoff was necessary strategically, regardless of how it may have been handled PR-wise or whether customers were ready for the change. It’s really about Netflix moving towards being a streaming-only business as fast as they can.
By Paul Erickson, Senior Analyst, IMS Research September 23, 2011

IMS research: excellence in market intelligneceWith all the fervor over the Netflix/Qwikster move and Reed Hastings’ response to criticism, it seems the collective media has perhaps lost some perspective on what the deal really means, and if it was actually necessary. In my eyes, it was necessary strategically, regardless of how it may have been handled PR-wise or whether customers were ready for the change.  It’s really about Netflix moving towards being a streaming-only business as fast as they can. Let’s explore why.

Netflix’s renewal of existing content deals and acquisition of new ones will not come cheaply, given that content owners have realized that the prior deals that were in place for streamed content were severely undervalued. The company’s content acquisition costs are sure to climb substantially. Also, if all the commitment to OTT video from every corner of the consumer electronics and pay-TV industries is any indication, streamed content is the future, physical media is not. Given these factors, I would be shocked if this move isn’t in the end just the first step in divesting or closing the physical media business and for efficiency streamlining down to a streaming-only brand within the next two years. Simply getting rid of their mail-based business in the near term before consumer adoption of OTT video reaches critical mass would be premature, given the customer backlash and the revenue stream that their traditional customer base still provides. I don’t buy all the other reasons being thrown around as the main drivers for the move. Trying to reduce the amount paid in streaming fees is somewhat valid, but an extremely near-term concern –  those costs pale in comparison to keeping around a logistically-costly discs-by-mail business within which the future of the company clearly does not lie.

The Qwikster move separates the main Netflix brand from the physical media business as they expand outside of North America. This seems appropriate, as it wouldn’t make a lot of sense to go through the cost and logistics to recreate discs-by-mail in South America, Europe, and eventually Asia. The company has stated it plans to be streaming-only in a few years anyway, and it will need all the capital it can get to potentially afford higher aggregate streamed content costs. Not just from Hollywood but also from all the regional content providers with which they will need to sign deals, in order to deliver local content in the new international markets they’re expanding to over the next several years.

So, in summary, Netflix:  Good move. Bad handling.

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