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Netflix Abandons Qwikster — Analysis From Gartner

| October 10, 2011
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Netflix today announced it is abandoning its short-lived plan to spin off its tried-and-true DVD-by-mail service from its perceived business of the future, streaming movies and TV shows directly into customers’ homes.

This new confusion comes on top of an ill-received price increase for its streaming service that prompted a slew of customer cancellations. Netflix last month slashed projected subscriber numbers for the third quarter by one million.

KQED’s Peter Jon Shuler today talked to Allen Weiner, research VP for Gartner’s media service, about the latest strategic contretemps by the Los Gatos-based company.

What do you make of all the moves Netflix has made recently?

Netflix is trying to accomplish a couple of things. They want to move where the biggest opportunity is for the company in their direct-to-consumer delivery space, but at the same time they don’t’ want to abandon customers who have been loyal in certain channels. So this has led to some confusion in terms of pricing and services and then basically starting up a new brand when the Netflix brand has been the one that people have relied on.

Netflix has a relatively short period of time to get its act together and to lock down consumers

In some ways the streaming and disk by mail businesses are quite different…

They’re differing businesses and have totally different structures, plus they have different release windows, which is the biggest issue.

A lot of this has probably occurred because of what Amazon is doing. Amazon will release its Fire tablet in mid-November and it’s going to offer people a huge amount of streaming at a reduced cost through Amazon Prime. So Netflix has a relatively short period of time to get its act together and to lock down consumers.

The future of Netflix is in streaming, mostly because the infrastructure cost of mailing DVDs is much greater than it is for streaming.

So Netflix has backed off, and Qwikster is the new New Coke…

It’s more the new Edsel. Because it’s been put to the graveyard and not only that it’s essentially like one of those TV shows that gets canceled before it even hits the air. Netflix is wise to put everything under one umbrella, one brand; it makes for easier marketing, it causes a lot less confusion. Clearly consumers are used to having the different product categories.

I think [Netflix's] immediate threat right now is going to be Amazon…

The issue that Netflix needs to face is how they can start moving some of those physical DVD titles into the streaming service. That’s the biggest challenge. New titles that come out on, say, a Tuesday are not available for streaming right away. The cost for licensing — that would be enormous. How they offer the quality of the physical DVD service in the streaming service is going to be one of the challenges the company needs to answer.

Right now the content in the streaming service, any way you cut it, is long on convenience but relatively thin on quality. It looks like a decent cable system: lots of content there but stuff that’s relatively old or out of the mainstream. That’s a matter of dealing with the studios and getting them to change their licensing agreements.

The consumer is going to be met with multiple choices, everything from Hulu Plus to video-on- demand to Amazon’s new service to whatever Apple has and Google. It’s going to be important for Netflix to continually upgrade the quality of its streaming service. I think their immediate threat right now is going to be Amazon, which not only has delivery to the TV set through a number of boxes, but is soon going to have millions of Fire tablets in people’s hands.

So did Netflix bungle here?

There’s two ways you can look at it. Certainly they made a bungle. But you have to admire the transparency that Reed Hastings and Netflix has had. This isn’t something they’ve done in secret and then sprung on customers. They’ve been really open and honest about it and I think that a majority of consumers are relatively forgiving when it comes to this, particularly if Netflix actually reacted to customer complaints. It’s refreshing to have such transparency from the company in admitting they probably were taking the wrong path.

I think this will earn some short-term loyalty. But customers are fickle. They’re going to go where they get the best price and the best content. It stops the erosion of customers just cancelling out of displeasure over the company; it puts a finger in the dike. But Netflix is not immune if somebody comes along and offers fresher content at a better price.

But streaming is the future?

Absolutely, because of the ubiquity of access that you have. You need to have a streaming service to be able to satisfy consumers across a variety of devices in a variety of scenarios. It’s clearly the only way to go in that world.

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