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Monday, September 19, 2011

Netflix has bad timing

We all know that timing is important. An action can succeed at one time but fail earlier or later. 

Today's announcement by Netflix that they are splitting the company in half, one for streaming and another for DVD-by-mail, is the right action at the wrong time. Without a doubt, streaming is where the market is going -- particularly the under-40 segment that Netflix covets. Without a doubt, usage of DVD-by-mail will decline because of migration to streaming, USPS rate increases, and a reduction in inventory (DVDs are perishable, and they are beginning to go out of print with no prospect of reissue). 

That said, Netflix faces intense competition in the streaming space. Today's announcement makes it more difficult for Netflix to migrate its DVD-by-mail customers to streaming without having those customers reevaluate the alternatives in the streaming market. Customers who use both streaming and DVD-by-mail -- already irate because of the recent price increase -- will be inconvenienced, adding insult to injury. Netflix will incur the costs of establishing and maintaining a second brand identity, Qwikster.

What should Netflix have done? Left the two businesses integrated while planning a clean divestiture of the the DVD-by-mail business -- which would be executed very shortly after being announced. A decision in 2013 to cleave Netflix would probably be impeccable. 2011 is too early. 2015 is too late. For these kinds of mistakes, Nortel managers had a wonderful euphemism: "directionally correct". The decision by Netflix to restructure is directionally correct but ill-timed. Wall Street hammered the stock again today. 

To make matters worse, the video of the Netflix CEO left me with an impression of insincerity and corporate self-centeredness.