Netflix gambles with two-tier strategy

In the media-and-entertainment space, who are the true disruptors? Who are the companies whose success defines the decade, and most threatens the incumbents? Beyond the big four (Apple, Google, Amazon, Facebook), one other company has been mentioned in nearly every conversation I’ve had with content providers, broadcasters and telecoms operators in the last year – Netflix.
Netflix has managed to build an audience of more than 20 million users willing to pay a subscription to access premium content. But now the company is at something of a crossroads (though reports of its impending demise are, as has often been the case, more wish fulfillment than actuality). The failure to renew the deal for Starz content followed the company’s decision to charge separately for physical DVD rental and digital streaming – a decision which will hit subscriber numbers in the short term at least. Now, as the company seeks to migrate users from the physical to the digital, it has rebranded its physical business as Qwikster, retaining the Netflix brand for its digital model.
Much of Netflix’s success can be ascribed to its ruthless focus on providing a great consumer experience – that last yard which still eludes far too many companies in this space. As a former colleague put it, Netflix didn’t just digitize the content, it digitized the customer relationship. But this latest move, while it may appease Wall Street and better position Netflix to grow as a digital-only proposition in the long term, threatens that hitherto special relationship. Where Netflix customers previously juggled their needs between the disc business (with a much deeper catalog) and the digital business (for immediate access to the content) via one website, they must now effectively choose between the two services – Netflix (for digital streaming) and Qwikster (for physical rental) – or manage two separate profiles. That doesn’t sound like a great user experience.
Netflix has been allowed to succeed so far because its competitors have, even after all this time, barely managed to get out of the starting blocks. It will gamble, not unreasonably, that it can weather a small storm at this stage because there is still nowhere else compelling for customers to go. But to succeed in the longer term it must invest heavily in the catalog (especially for the digital service) and rebuild its relationship with its loyal customers.
For those of us outside the reach of Netflix’s services (and its recent rollout into Latin America has perhaps been overlooked amid other developments), its reinvention is still of huge importance. The US market is not the only one where incumbent providers have failed to provide their customers with the right content in the right format at the right price. Netflix, with its focus on a great customer experience, is the prime example of how an over-the-top provider has outperformed incumbent operators in meeting consumer demand. It’s not a coincidence that movie piracy has stalled in the US market: if you provide consumers with a legitimate alternative, many of them will vote with their wallets.
Company chief executive Reed Hastings also knows that Netflix must continue to innovate, to be radical, to think differently. He argues that companies rarely die from moving too quickly, but often die from moving too slowly. He will know better than most, for example, how the movie studio’s strategy of squeezing the last drop out of the dying DVD sell-through window has hindered their ability to develop credible digital alternatives.
There are very smart people working for cable operators and studios, but they can’t make things happen in the way that Hastings has with Netflix. Few companies are bold enough to accelerate the transition to digital at the expense of incumbent revenue streams (though UK car selling site Autotrader, for example, has succeeded spectacularly by doing just that). In time, we may see this as a brilliant strategic move that enabled Netflix to enhance its position as the leading global provider of digital movie content. But there is much work to be done to get there, and tricky relationships with…content providers and consumers to renegotiate.
Could this be the right time for other providers to finally enter the arena? Or even for operators to finally integrate Netflix into their services?

Original article: Netflix’s split is a gamble, but don’t bet against them