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Five Reasons Why The Netflix Split Is a Great Idea

By / 09.23.11

A lot of people have discovered that the whining about Netflix was just getting startedThe Oatmeal sums up how a lot of people feel about Netflix splitting off its DVD service into “Qwikster” while retaining Netflix for streaming.

To be totally blunt, these people are not paying attention. Business-wise, this is a great idea for Netflix. In fact, Netflix is doing exactly what a smart business does. People think they’re blundering, but they’re looking at where Netflix is standing instead of where Netflix is looking — namely, at the writing smack on the wall.

It’s pretty simple: Netflix’s DVD delivery service is about to become a nasty, unprofitable side of their company. Why?

1) DVD Infrastructure Costs a Freaking Fortune

Let’s start with the most basic: streaming isn’t cheap, but DVD delivery costs a lot more. Netflix has to shell out for staff in processing centers, it has to rent those processing centers (or build them, which costs more), it has to hire people to work at those centers, and, oh yeah, stock them with DVDs.

Netflix buys their DVDs in bulk, but there’s still a markup; Netflix owned 42 million DVDs back in 2007 and it probably owns more than twice that by now. Say ten bucks a disc, and Netflix owns, literally, $1 billion of digital media. This is before any replacements, by the way. They’ve probably spent at least $2 billion buying discs over the life of the company, and probably a lot more.

And that’s before postage. Which brings us to big problem number two.

2) The Post Office Is Dying

We’re a little surprised nobody has put two and two together on this. Why did Netflix set up a major part of its business to be thrown out into the wilderness like a leper, and why did it do it so quickly?

Well, let’s see here, they deliver DVDs through the mail, which is run by the Post Office, which if something doesn’t change pronto, is going to basically shut down next year. Among the ideas that might help: firing lots of postal workers, ending Saturday delivery, closing postal routing centers, shutting down post offices. These are all cost-saving measures, but the key thing is that every single one of them will delay your DVD delivery by at least a day. Depending on where you live and what happens, possibly more.

If there’s one thing Netflix knows its customers absolutely hate, it’s waiting for their DVDs. Before they were crying and screaming over a six buck price raise, a common Netflix whine was they didn’t deliver the DVDs fast enough. That’s part of the reason Netflix got into streaming in the first place.

By the way, the worst case scenario is that the Post Office stops delivering to your door completely. Think about that for a minute. Are you as willing to subscribe to a service where you actually have to go and pick your DVDs up? Especially since such a service already exists?

3) They Can’t Match Their Main Competitor in the DVD Sphere

Ever since Blockbuster went deservedly down the toilet, there have been two major competitors in the field of loaning you a DVD to watch that night: Netflix and Redbox.

Redbox, for those unfamiliar, is literally just a company that puts kiosks in places like grocery stores and convenience stores with a fairly simple mechanic, which is that by giving them a dollar, and you can rent a movie for twenty-four hours. In a lot of ways, Redbox is brilliant — it’s aimed squarely at the cost mentality of your average American (quick, what do you pay for a legal MP3 download?) It’s designed to be convenient and cater to impulse purchasing. And it’s fairly easy to use.

This isn’t to knock Netflix’s usability — it’s extremely well designed and its recommendation engine is superb. It also has vastly better selection. But it sends you the DVDs by mail, and Redbox has them right there. For people who want to just watch a movie and don’t want to plan ahead, Redbox is pretty much ideal, and it’s probably going to take over the DVD sphere.

Of course, that comes with its own problems.


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TOPICS#NETFLIX
TAGSgreat ideasstop and thinkwhite whine

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