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Netflix, Qwikster and the Challenge of Navigating the Digital Transition

Aymar Jean Christian September 20, 2011 uncategorized 3 Comments

UPDATE: Netflix has decided to not split its DVD business into Qwikster.

In September 2009 Netflix was trading at around $50 a share, the next year it was at $150 and just a few months ago it reached a peak of $300. Netflix’s meteoric rise wasn’t a bubble, it was based on its growing subscription base and buttressed by its bold moves to license — and possibly make — premium content.

More importantly, Netflix was seen as uniquely adept at navigating the transition to streaming video, unlike competitor Blockbuster, who was fatally behind.

That’s why there’s been such a hullabaloo, a collectiveWTF,” from customers and media analysts over the company’s decision to split in two, DVD and streaming, with DVD distribution operating under a new brand, in lamely labelled “Qwikster.”

Does Netflix deserve the backlash? Yes and no. No, because the company has been very candid about its belief in streaming and the forthcoming death of the DVD. Moreover, before the Qwikster announcement, customers had already been riled up by price increases, which apparently was the first step toward Qwikster. Emotions were — and are — high. And there are a lot of good reasons for the new brand, renting video games chief among them. Says NYMag:

For Netflix, it also means two distinct brands with separate headquarters — the DVD business will be centered in San Jose while the corporate offices are in Los Gatos — and a different set of competitors, all of which could make things easier if the company decides to sell the DVD-by-mail part. Already the company is seeing the majority of new subscribers opting for stream-only packages and this move will accelerate that shift.

Meanwhile, the DVD business competes only with physical rental outlets like Redbox and the long-struggling Blockbuster, or gamer havens like Best Buy and Game Stop. Things could potentially get sticky for this side of the business should the U.S. Postal Service continue to have problems. And so, as noted by tech writer Dan Frommer, “Having a nondescript name that doesn’t suggest ‘mail’ or ‘movies’ is probably a good thing, given [Qwikster's] unclear future.”

But still, Netflix has clearly pushed customers, perhaps too fast. Subscription revenue, and subscribers, are down and projected to go down further by some analysts.

We all know the DVD will eventually go the way of the VHS. I rarely play DVDs; my shelf with the complete Woody Allen collection and a bunch of Hong Kong action films has been collecting dust for months.

But media transitions are painful, and no company, no matter how smart, navigates them perfectly. This has been true of much of 20th century “new media.” Digital technologies have obviously been more disruptive. The music industry is only now starting to figure out how to live in a post-CD world, and newcomers like Spotify are constantly giving it headaches.

Netflix is trying to not be the music industry, which enjoyed record revenue in the 1990s and never heeded the warning signs. It worked hard — and is still trying — to protect existing, unsustainably high revenue even as technology changed consumer habits.

Like when Facebook introduced the news feed, and users revolted, Netflix will likely survive and potentially thrive under its new business, so long as it minimizes disruption to its services, like ratings and queues. Perhaps it will sell of the DVD business to Redbox or something company willing to take an ailing business.

The real danger for Netflix in my opinion isn’t the loss of the DVD, but aggressive competition from other web video distributors like Amazon, Dish/Blockbuster, Hulu, etc. and especially cable operators like Comcast, which are upgrading streaming options rapidly and of whom TV networks and studios are less skeptical. As the likes of HBO offer their own streaming services and work with the MSOs (who offer the security of authentication), Netflix could be left out of the picture — hence its move to make its own programming, and fast. Will Richmond at VideoNuze has a good overview of Netflix’s place in a fiercely competitive market.

Netflix is now trading at $130, way down from its high. Will this gusty move permanently cost the company market share, or will analysts eventually tell tales of how the company was far ahead of the curve, securing a place as one of the first major web video networks? As usual, only time will tell.

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About The Author

Aymar Jean Christian is assistant professor of communication at Northwestern University. He writes about media and society for a number of publications. For more information, click the "About" tab at the top of the page.

3 Comments

  1. Jimblogger September 21, 2011 at 7:29 am

    It’s really sad to see a company such a netflix go down the tubes but lets face it, their selection sucked. Old TV re-runs and l;ow budget movies wasn’t worth it when I can get new release for $1 at redbox.

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