Does Netflix Know What Its Own Product Is?

Today’s blog post is by Michelle Paul, who is the co-author of Breaking the Fifth Wall and product manager for our products PatronManager CRM and PatronMail. I think her perspective on the Netflix changes is a valuable follow-up to my post on this subject last week. EVC

Last week, Netflix announced that it’s splitting up its two services — DVD-by-mail, and online streaming — into two separate companies. Customers who want to continue to have access to both formats will need to maintain two separate accounts.

Clearly, Netflix has taken a long hard look at the future of movies and television and media formats, and realized that someday, sending pieces of plastic through the mail will seem as laughably antiquated as dial-up Internet is today. Everyone will have a broadband connection and online streaming will be the norm. But did Netflix make a smart move by radically reinventing their business model now, while DVDs are still hanging in there, if not going strong?

Maybe. Maybe not. That depends on what Netflix’s product really is.

The events of the past week seem to indicate that Netflix sees its product as being “movie delivery.” CEO Reed Hastings’ justification for splitting the business in two is that it means the company will be “better at streaming” and “better at DVD by mail.” But is that really all Netflix is to its customers?

I would argue that the value of Netflix isn’t just “here’s a place where you can watch a bunch movies.” Netflix’s real product, the thing that separates them from whoever else comes along, is the history and preference data that users have been able to build up in their accounts over the years. To use myself as an example: I’ve been a Netflix member since June 2004. My queue currently has just over 100 items in it. I’ve rated just 89 movies over the years, and that’s enough data for Netflix to deliver me 1,419 recommendations of other things I might like to watch. And all of those items are just about evenly split between DVD-only and streaming availability. (A super-informal poll of my coworkers suggests that these numbers are relatively normal.)

But when Netflix splits off the DVD product to Qwikster, both services immediately lose value. Now instead of having all of their historical viewing and rating and queue data in one place, users will have to log into two accounts that won’t talk to each other. If you search for a movie on the streaming side and don’t find it, you won’t be able to easily add the disc to your queue for later, and will you bother to log into a separate site to do it? Probably not, so now you no longer have the value of the queue as a place to remind yourself of things you want to watch someday. And if user ratings have to get split up by media format, the recommendation engine will inherently suffer — there will be half as much data to work with.

So from then on, all the real value customers can get out of Netflix is that it will let them watch a particular movie, and that puts the company is a precarious position, because that means its business is 100% dependent on the movie studios choosing to continue to work with it. Right now, Netflix does happen to have the advantage of having a larger catalog than any other single service, but that’s basically at the whims of the studios and could disappear at any time. (And does! The Criterion Collection is gone now, and Starz will be dropped in a few months.)

Without the queue — without the history — there’s nothing keeping someone loyal to Netflix and nothing stopping them from switching to another service that comes along someday to make better deals with studios and end up with an equally large catalog.

I’m all for adapting to changing technology, obviously, and I too believe that DVDs will die out eventually. But in deciding that its product is simply movie delivery, and counting on the continued cooperation and negotiation with studios going in its favor, it seems like Netflix has lost sight of the real value its product provides to its customers.

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