About 3 weeks ago we wrote a post titled Why Netflix Chose To Create a Bad Customer Experience about the company's decision to split off and rebrand their movies-by-mail service into Qwikster while dedicating the Netflix brand solely to streaming video. Now Netflix is abandoning that plan. What is happening here? What is the reasoning behind this latest decision?
Netflix says "They Moved Too Fast"
The reason Netflix has decided to reverse their decision to split the company into two brands is described by Reed Hastings as the following:
There is a difference between moving quickly'which Netflix has done very well for years'and moving too fast, which is what we did in this case.
In other words, he is saying that Netflix's customers are not ready to give up DVDs in favor of streaming. Why is that? Reading deeper into this statement, the real problem he is highlighting is that Neflix does not have enough streaming content to win consumers over. If they had the same content on streaming as they did on movies-by-mail service, people would happily have stayed on the newly branded "streaming only" Netflix service.
Their Real Problem: Streaming Content Deals
As we mentioned before, the real problem Netflix is facing is that it cannot get the deals with movie studios it needs to make streaming possible. The movie industry does not want to give Netflix too much control, and the studios love that Netflix is moving DVDs and keeps giving the company access to their libraries for the DVD rental service. Rising costs for streaming content is killing Netflix's streaming business.
A recent example of this is their disagreement over pricing with Starz. All video providers are competing to have as much exclusive content as possible. When asked, "who is really in the drivers seat, providers or distributors," Reed Hastings said the following:
Content owners are in the driving seat, not us. We put offers to license content from them for millions of dollars a year. It's up to them to decide whether to accept these deals.
It's worth noting that Netflix has landed a deal with CBS back in February making it the only streaming provider to now offer content from ABC, CBS, NBC and FOX, the 'big four' of US broadcasting. Little by little they're getting the deals they need, they're moving in the right direction.
They are in a tough spot however, their streaming service needs more content before it's going to compete with Apple and Amazon without the movies-by-mail service. In order to get more streaming deals, they need more streaming subscribers so that they can pay higher fees to license the content. They are caught in a catch-22 situation and are trying to make the right decision to grow the business and provide an excellent service at the same time. Negotiating deals for more streaming content will be at the heart of their business strategy going forward.