When I first heard news of the Netflix price increase, I think I took it like most others did. From my perspective it looked like an appeal to become more profitable and potentially increase their stock price. They were probably finding the cost of doing business to be higher than anticipated, I thought. It certainly wasn’t going to sit well with existing customers. It didn’t. Like many others, today I received a nice email from Reed Hastings, CEO and Co-Founder of Netflix, explaining the reason for increasing the price of the bundle of delivery and streaming of content under the Netflix brand. As expected the instant response by the vocal masses of twitter and blogdom panned the email/blogpost as a new opportunity for humor and another wallowing through a mire of fail for Hastings.
As I read Monday morning’s email from Mr. Hastings, I had an entirely different set of thoughts. “For the past five years, my greatest fear at Netflix has been that we wouldn’t make the leap from success in DVDs to success in streaming,” wrote Hastings. “Most companies that are great at something – like AOL dialup or Borders bookstores – do not become great at new things people want (streaming for us) because they are afraid to hurt their initial business. Eventually these companies realize their error of not focusing enough on the new thing, and then the company fights desperately and hopelessly to recover. Companies rarely die from moving too fast, and they frequently die from moving too slowly.”
He is exactly right. Hastings alludes to “Disruption Theory” the elegant theory illustrated by Harvard’s Clayton M. Christensen in his magnum opus, The Innovator’s Dilemma. Mark Suster of Furtune said of the book, “It’s the most profound book I’ve read on thinking about how the Internet is changing business. Period.” For what it’s worth, I agree.
To simplify the theory, if market leaders continue to focus on improving their product to fit the demands of their best customers they will eventually be undercut by new market entrants who either do the same job in a more convenient and cheaper way or who give access of a solution to consumers who have never had access in the past.
Hastings is justifiably concerned about weakening Netfix’s position as a leader in content streaming by focusing too much on the old model (DVD mail delivery). Separating the two services, which target two different consumer behaviors as stated in Hastings’ communiqué is a step in the right direction. While many customers have seen it as a price increase, it is truly an effort to separate the two services, eventually outmoding the old and elevating the new.
Hastings followed the strategy laid out in “The Innovator’s Dilemma” to a “T”–except for one part. While Christensen does not go into branding in his book, he does suggest that incumbents should start separate business entities to innovate at the low end thereby warding off potential market disruptors. In a nod to Schumpeter, Christensen posits that technology will eventually destroy your profits, so you might as well be the one to do it. Where Hastings has taken things a bit further is the transfer of the Netflix brand from the old technology platform to the new. This is a brilliant move in my opinion. Qwickster is essentially a brand created to die with its technology. Rather than creating a new brand for the new technology, Hastings is creating a new brand to die off with the old technology and preserves the equity of “Netflix.”
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