DVDs By Mail

The big news today is Netflix spinning off their core DVDs-by-mail business into a company called qwikster.com.

[Click here to jump to the "Translation" article (separated from this one)].

I was late to the Netflix party. While my friends raved about it back at the height of the dotCom boom, I didn’t join until late 2000.

### Recalling 2005 ###

By 2005, I was engrossed in an argument over lunch with two co-workers. Blockbuster had introduced a Netflix copy where you could return your rentals at any brick-and-mortar store, and Walmart was just about to launch their version.

They stated that one or both would wipe out Netflix, I disagreed.

“It’s not Walmart’s core business. They’re going to give up.”

“What the hell are you talking about? Walmart will kill them.”

“I used to work in travel. When Walmart announced they were going to do airline travel, everyone shit a brick. But it was all hoopla. Within a couple months they had sold that business and abandoned it. Walmart’s advantages in supply chain don’t translate online.”

“You don’t know what you are talking about,” the other answered. “I have a friend who works at Walmart.com and they’ve been profitable for six quarters now. Amazon hasn’t had one profitable month, let alone a quarter.”

“I didn’t know that,” I replied. “But I bet there is some bullshit going on here. Walmart sinks more money into IT than any other company in the world, they probably don’t count a lot of that in their profits numbers because they’re already sunk costs or something. Amazon only has an online presence, they could become profitable any time and once they do, it won’t stop. Back to the point, I think Walmart will give up on DVD rental just like they gave up on travel. Those businesses just don’t work the way traditional ones do. And Blockbuster will do even worse. The real question is which one will get killed by Netflix sooner.”

“You’re wrong, Terry. You don’t know what you’re talking about. Walmart is the gorilla and Netflix is small compared to Blockbuster, let alone Walmart, and you can return rentals to there.”

“You’re right, I don’t know business, but what I do know is what sort of customer they have. The average person I know with a Blockbuster subscription has a family like you, D—. And the average Netflix customer is like J— back at the office or me. The average Netflix customer isn’t getting anything for days anyway and is working off a queue. They don’t care when it comes, just that it comes. I have a friend who has a Blockbuster subscription and when his kids want to see Mulan or something, then Blockbuster better have it in stock. That and the new releases—tons of copies of new releases. With Netflix you need to stock a variety, but not too many of any single title; with Blockbuster you stock tons of new releases that you fire-sale when they turn to shit. How is the logistics of brick-and-mortar rental returns going to work out in a world where the average Walmart or Blockbuster customer’s kid wants to see Sponge Bob and they want to see it tonight or they’re going to cry and shit?”

The whole lunch went with those two telling me how wrong I was. When I got back to the office, I talked to J— about it. He took my side, somewhat and pointed out one other thing. “Yeah, Netflix is awesome! But it doesn’t matter anyway because DVDs-by-mail is a dying business once streaming takes off. The founder of Netflix once said that they knew DVDs by mail would be temporary until streaming comes out—that’s why they named themselves “Netflix” and not “DVDsByMail.”

(You can bet that when Walmart gave up their DVD-by-Mail business, and when Blockbuster gave up on the same, I gloated about it. I would have gloated about Amazon, too, but that happened so slowly there was no single event about that.)

### Yes, but that’s not how you do it ###

J— brought up an amazing point. The salient goal of Netflix is video rental using the internet, and DVDs-by-Mail was a stop gap to get that done. It was always supposed to be temporary.

So when we get to the reasoning from the CEO, this point falls into place.

> 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. 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). So we moved quickly into streaming, but I should have personally given you a full explanation of why we are splitting the services and thereby increasing prices. It wouldn’t have changed the price increase, but it would have been the right thing to do.

[Subscription for video seems to work][the music subscription model]. So this argument on first blush seems to a good thing right?

No.

Let’s take this analogy, but instead of AOL dialup, we use Microsoft.

Microsoft had an operating system monopoly with DOS, but when Windows started to get traction, did they spin off the the DOS business into “DOSster?” Or did they gradually parlay their DOS monopoly into a windowing system monopoly so slowly that most users can’t tell [when DOS got removed from Windows][Windows XP]?

And, I’d say a better analog to Netflix is not Borders bookstore, but Amazon.com. Now that the Kindle is taking off, does anyone honestly see Amazon spinning off the books-by-mail business into “Bookster?” Be honest.

Even the worst offender of backward compatibility and support, Apple, doesn’t stop calling their outdated Macintosh’s “Macsters.” They successfully parlayed the Mac into the iPod and the iPod into the iPhone. And last I checked all three are still sold by Apple and not by “Macster,” “Musicster,” and “Phonester.”

In other words, nobody is arguing with Reed Hastings that Netflix shouldn’t move big into streaming. And only the idiots are complaining about the separate streaming/DVD-by-mail pricing and new stream-only accounts. These are good things, Netflix saw a disruptive technology coming and anticipated it with a business model that everyone knows is going to replace it. Bully them!

But you don’t parlay your existing advantage into a new one by pissing on your own users.

### Why users are pissed ###

Look, if you never used Netflix until Netflix streaming, [you probably don't care][john cole]. That’s great for you.

But what we are talking about is [the art of the parlay][art of the parlay]. You want to pivot the existing user base to a new platform while picking up new users. Spinning off your business ends this parlay. Instead of pissing off the few number of cheapskates (who want free streaming with their subscription), you now end up pissing your entire existing user base (these movie fanatics who aren’t rushed to see the latest movies). These long-tail first movers make the best spokesmen for the big-middle of new users you want to take (the Walmart crowd, the old Blockbuster crowd who want Sponge Bob Square Pants streamed to them **right now**).

In the [next article][next article], I will [translate][translate] the rest of Reed.

[next article]: http://terrychay.com/article/translation-from-asshole-speak-to-english-of-selected-portions-of-netflix-ceo-reed-hastingss-e-mail-to-netflixs-entire-customer-base.shtml “Translation From PR Speak To English of Selected Portions of Netflix CEO Reed Hastings’s E-Mail to Netflix’s Entire Customer Base”

[Gamefly]: http://www.gamefly.com/ “Gamefly: Video Game Rentals”

[dead pool]: http://www.fuckedcompany.com/ “Fucked Company is Fucked. The dead pool”

[Huffington Post]: http://www.huffingtonpost.com/2011/02/07/aol-huffington-post_n_819375.html “AOL Acquires Huffington Post”

[john cole]: http://www.balloon-juice.com/2011/09/19/odd-man-out-again/ “Odd Man Out Again—Balloon Juice”

[Windows XP]: http://en.wikipedia.org/wiki/Windows_XP “Windows XP—Wikipedia. While Windows still has a DOS prompt, the first Windows not built on top of DOS was Windows NT. The first consumer Windows built on that kernel was Windows XP, which succeeded Windows ME which succeeded Windows 2000.”

[art of the parlay]: http://daringfireball.net/2004/08/parlay “The Art of the Parlay, Or: How I Learned to Stop Worrying About Platform Licensing and Market Share—Daring Fireball.”

[the music subscription model]: http://terrychay.com/article/the-music-subscription-model.shtml “The music subscription model. Here was an argument from the same time period with a different co-worker. This one felt that Virgin Music would kill off Apple iTunes. I disagreed. :-)”

[bittorrent]: http://en.wikipedia.org/wiki/BitTorrent_(protocol) “BitTorrent (protocol)—Wikipedia”

[hulu plus]: http://www.hulu.com/plus “Hulu Plus”
[translate]: http://diveintomark.org/archives/2007/04/16/dhh-translation “Translation From PR-Speak to English of Selected Portions of Rails Developer David Heinemeier Hansson’s Response to Alex Payne’s Interview—Dive into the Mark”

[kindle app store]: http://www.huffingtonpost.com/2011/08/10/amazon-kindle-cloud-reader_n_923573.html “Amazon Kindle Cloud Reader Sidesteps Apple App Store Restrictions—Huffinton Post”

[wired app store]: http://paidcontent.org/article/419-conde-nast-does-last-minute-pivot-on-wired-app-pricing/ “Conde Nast Does Last-Minute Pivot On Wired App Pricing—paidContent”

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