Netflix’s Split Misses The Trick

Netflix (NSDQ: NFLX) splitting itself in two for two different media is the wrong strategy at the wrong time.

Yes, DVD and online movie rental businesses are quite different. But therein lays the opportunity

Connected-TV consumption is about to explode. Customers who currently get Netflix DVDs by post are now buying internet-enabled TVs with built-in Netflix.

The challenge for Netflix is to migrate one to the other – a transition that is already happening naturally but which Netflix should be helping. But, by separating each, Netflix makes it harder to ensure the old side of the business can help the new one grow.

The coming decline in Netflix’s DVD business is both its biggest threat – and its greatest opportunity. CEO Reed Hastings should be regarding his DVD customers as the most fortuitous pool of potential digital adopters that could ever have fallen on his lap – a readymade market of entertainment fans all set to make the switch. A smart move would have been to actively induce DVD renters to start watching online over the next few years.

Instead, with its Chinese wall, Netflix has diluted its brand, leaving it with a plastic-disc business it knows will decline all by itself, and an online business which it now has to grow in isolation.

Now, it’s not whether customers of the Netflix brand will transition from DVD to online, it’s whether Qwikster customers will switch to a different provider on a different device.

When you isolate the online Netflix from the plastic Qwikster, Netflix looks a lot less appealing – its online catalogue is about a tenth the size of its DVD roster, because online subscription rights are harder to come by.

Maintaining a holistic, cross-media business would at least have allowed to easily obtain their chosen content, whatever the format.