Netflix is Playing for the Endgame

(This article originally appeared at Harvard Business Review)

Every now and then, the business world presents us with a lab experiment that we can observe in realtime. Netflix’s announcement that it is splitting off its DVD-by-mail business from its streaming business is just such an experiment. The DVD business will now go by the name Qwikster, and the streaming business will stay under the Netflix brand. It isClayton Christensen’s innovator’s dilemma incarnate, and Netflix is very publicly trying to solve it. Like its 60% price increase did earlier this year, this move is understandably causing consternation amongst some customers. It’s a bold move, one that will cost them in the near term, but Netflix I’m sure has done the calculus and is looking at the endgame 5-10 years out, not 5-10 months.

In his blog post about the split, Hastings says:

“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 dial-up or Borders bookstores — do not become great at new things people want (streaming for us) because they are afraid to hurt their initial business. Eventually these companies realize their error of not focusing enough on the new thing, and then the company fights desperately and hopelessly to recover. Companies rarely die from moving too fast, and they frequently die from moving too slowly.”

Hastings goes on to acknowledge, “It is possible we are moving too fast — it is hard to say.” This is frank admission of the complexity of the strategic landscape. The media content and distribution business is in a period of massive flux, and while we can say with near certainty what the end state will be, near-term predictions are hard to make.

About five years ago I did this somewhat tongue-in-cheek “timeline” of pivot points for a client in the TV business:

Click to Enlarge

 Half-jokingly it made the point that there is a giant hairball of complexity, consolidation and confusion that the industry is going to have to go through, but if you can survive that, the obvious end state will be that any piece of media will be available whenever an individual wants, wherever they are, on any device they like. (We’re about half way through the hairball at this point with DVD Rental vs Video-on-Demand being the current pivot point. I over-estimated the speeds at which changes would settle out, but it was never meant to be a precise timeline, just directional.)

Now consider this: there are over 200 job openings at Netflix headquarters alone (compare this to 61 openings at competitor Hulu, at all its locations.) The vast, vast majority of these are for software development of one sort or another to support the streaming business. Netflix is building a platform for the streaming/cloud end game; it is not building for the near term, or DVDs by mail.

On top of the technical skills, Netflix is building an organization tuned to the needs of a disruptive environment. This presentation on Slideshare (embedded below) paints a fascinating picture of Netflix’s culture (the Slideshare account is under Reed Hastings’ name, but I doubt it’s actually his).

Several things are worth pointing out from this lengthy document:

1. Netflix focuses on increasing “talent density” more rapidly than business complexity increases. This means demanding high performance standards of new hires, paying top dollar for them, and then giving them freedom to use their own judgment in a highly dynamic competitive and service environment.

2. It notes, “Sometimes long-term simplicity is achieved only through bursts of complexity to rework current systems.” This is exactly what Netflix is going through at this point, introducing additional complexity for a period in order to bring longer-term simplicity (i.e., focus only on streaming).

3. Netflix’s focus is on “rapid recovery”: recognize problems when they occur and fix them quickly, rather than try to predict every outcome ahead of time. This mirrors Hastings’s statement about possibly moving too fast. The presentation goes on to say, “We’re in a creative-inventive market, not a safety-critical market like medicine or nuclear power. You may have heard preventing error is cheaper than fixing it — Yes, in manufacturing or medicine…but not so in creative environments.” Music to any innovator’s ears. Some will call this naive, and certainly there can be downsides if not handled well with customer service (and Netflix has stumbled in this recently, which Hastings admits, then proceeding to clumsily talk about business models and cost structures in his letter to subscribers). But overall it’s the right approach for this context.

It’s hard to know if this document reflects reality. But I give it the benefit of the doubt for a couple of reasons. First, it’s so thorough and consistent in its message. But more important, when it comes to execution Netflix is an outstanding company (the attention to detail put into its user experience is fanatical), that it is clearly getting the best and the brightest, even though it is not the sexiest of tech companies. Netflix has set itself up with just the right type of smart, nimble, curious, and fearless organization that it needs to thrive and outwit competitors in the challenging times ahead.

Netflix will be roundly criticized from many quarters for its bold move, and it will upset and probably lose many customers. But it’s the long-term endgame that Netflix is playing for. No one ever said self-cannibalization is painless.

Culture

View more presentations from Reed Hastings

Starbucks Via Instant Coffee as a Disruptor

I haven’t yet had an opportunity yet to try Starbucks’ recently launched instant coffe, Via, (I’m more of a Peets guy), but Scott Anthony has written a nice article about why it makes for an interesting disruptive play into the coffee market.

The company allegedly spent more than two decades developing Via, focusing on creating instant coffee with a taste profile that at least reasonably approximates in-store coffee. CEO Howard Shultz said, “We took a lot of time with it because we knew it could undermine the company if we didn’t do it right.”…

I wouldn’t say that Via was as good as a cup of coffee brewed at Starbucks (and truth be told, I prefer Dunkin’ Donuts coffee anyway). But in classic disruptive fashion, Via delighted me by substantially out-performing the other options available in my parents’ house. It is a great example of a company finding a powerful way to “love the low end.”

Read more >

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Here's an Idea: Let's Make Our Products Worse

How’s this for a strategy: when faced with declining customer base and disruptive competition, make your product worse.

That seems to have been the thinking at the San Francisco Chronicle newspaper for the last few years. Faced with disruptive threats that have hammered its subscription rates (people reading online, getting news from other sources) and classified ads revenue (Craigs list), they have gradually made the paper worse and worse. It is now at its slimmest and lightest (in every sense of the word) that I’ve ever seen it, and I used to deliver it in high school 20+ years ago. (For some reason I still remember the headline announcing when the Dow broke 2,000…)

In the last week they rolled out a new design of the paper which brightens it up and makes it more organized in some ways. But it unfortunately looks more like a small-town paper now, too. Why can’t San Francisco, one of the most influential cities in the country (especially now with the Democratic leadership) have a paper that matches its clout and innovative spirit in other areas? Considering that the Chronicle is smack in the middle of Silicon Valley and Web 2.0, their website comes across like a portal from 1999 that’s trying to be everything to everyone.

In terms of the physical paper, they have been consolidating and trimming sections. These are transparently more about penny pinching than improving the quality of the reader experience. The most ridiculous example is putting the Business section on the back of another section, so that it reads backwards. Since most stories split onto a page inside the section, this makes you go through a counter-intuitive process to find it.

The aesthetic and organizational changes are one thing, but they don’t get to the heart of the problem: the reporting and writing. With a few exceptions they are just not that great. I’ve never seen the Chronicle make a serious effort to, across the board, improve the quality of these core elements of the newspaper. There is almost zero investigative reporting, and the writing is generally not very engaging. A lot of use is made of AP feeds and articles from other papers. I mostly read the NY Times online because it is just much more interesting and enjoyable to read.

Look, these are tough times for newspapers, no doubt about it. Big operations like the Times have much more resources to invent new things. But since when in the Bay Area is being small and under-resourced seen as bad? It’s practically a badge of honor and means that you do interesting things in smart, nimble ways. The Huffington Post is the most innovative online news site, and they are tiny.

When faced with competitive disruption, do you keep digging the path you’ve been going on, or take a step back and re-assess what business you’re really in? The music companies finally seem to be coming around to this; instead of using concerts to promote albums (seeing albums as the main revenue source) they are now using singles to promote concerts (don’t rely on revenue from mp3s, but make revenue up through multiple other sources).

Newspapers need to do the same kind of rethinking.