Reed Hastings' Dilemma
Something just occurred to me. I can't track down the citations tonight, but feel free to bug me about it if you're interested.
Netflix has been acting strange lately: changing its pricing scheme, half-heartedly attempting to split off its DVD-by-mail business, and other moves have puzzled some people, including me. On the drive home yesterday, it occurred to me that an internal conflict might explain most of this: Reed Hastings might be disrupting himself.
I mean "disruption" in the sense used by Clay Christensen in books such as The Innovator's Dilemma: the creation of a tiny, low-end business niche that grows in such a way as to fundamentally undermine and eventually subsume a larger, more traditional niche.
Netflix has been working to disrupt the business of video distribution since its inception, and, in interviews, Reed Hastings mentions that streaming was always the long-term plan. DVDs by mail were, from what I've gathered, a temporary kludge. This mode of pushing bits had a seductive combination of excellent bandwidth (especially for 1999) and unbeatable market penetration, that made up for its logistical difficulties and tooth-gnashingly bad lag.
Now that broadband is more common, and the ecosystem of video hardware has diversified enough, Netflix is finally in the streaming business, and their DVD-by-mail business gives them both the profits to invest in doing it properly, and the brand recognition and market share to start out more smoothly and strongly than is usually possible in such a new business. It must have felt so good to finally accomplish that, unless and until the numbers began to show a problem. I wonder if streaming, even within the company and providing a carefully-hamstrung tranch of content, tends to cut into the DVD-by-mail business, and if the leaders of Netflix recognize this as a fundamental problem.
If the situation is what it looks like to me, and Christensen's theory is correct, this is a real dilemma. Streaming will inevitably become better business than DVD-by-mail, but as long as that incumbent business exists, it and any disruptive business are locked in a negative-sum game. The new Netflix can grow, proportionately, very fast, but that expansion will be more than offset by resulting contractions in the old Netflix.
Most incumbent businesses take an approach that's optimal in the short term, and ignore the disruptive business, or work to slow the development of technologies that would enable it. But most business models aren't faced with disruption until they're at least 20 or so years old: this case raises additional complications. With the founder still involved, and still moved to be a revolutionary, the shareholders might be led through a short, self-imposed contraction on the path to the long-term optimum. Or maybe the doomed, hidebound business that's so last decade can be walled off from the revolutionary project that it was built to support, given a throw-away name and some risk-averse management, and promptly outmaneuvered until it's deadster.
It's tough to please investors in either scenario, though,or to maintain a good public image. It would be sad and traumatic, but maybe the way Mr. Hastings can realize his streaming plans, without making things too much worse for those who've come to depend on DVD-by-mail revenue, is to resign, craft a new startup, poach the best talent, and maybe acquire his old business with his new one after nature takes its course. I bet he knows a few good angel investors. I just hope to keep my queue.
Netflix has been acting strange lately: changing its pricing scheme, half-heartedly attempting to split off its DVD-by-mail business, and other moves have puzzled some people, including me. On the drive home yesterday, it occurred to me that an internal conflict might explain most of this: Reed Hastings might be disrupting himself.
I mean "disruption" in the sense used by Clay Christensen in books such as The Innovator's Dilemma: the creation of a tiny, low-end business niche that grows in such a way as to fundamentally undermine and eventually subsume a larger, more traditional niche.
Netflix has been working to disrupt the business of video distribution since its inception, and, in interviews, Reed Hastings mentions that streaming was always the long-term plan. DVDs by mail were, from what I've gathered, a temporary kludge. This mode of pushing bits had a seductive combination of excellent bandwidth (especially for 1999) and unbeatable market penetration, that made up for its logistical difficulties and tooth-gnashingly bad lag.
Now that broadband is more common, and the ecosystem of video hardware has diversified enough, Netflix is finally in the streaming business, and their DVD-by-mail business gives them both the profits to invest in doing it properly, and the brand recognition and market share to start out more smoothly and strongly than is usually possible in such a new business. It must have felt so good to finally accomplish that, unless and until the numbers began to show a problem. I wonder if streaming, even within the company and providing a carefully-hamstrung tranch of content, tends to cut into the DVD-by-mail business, and if the leaders of Netflix recognize this as a fundamental problem.
If the situation is what it looks like to me, and Christensen's theory is correct, this is a real dilemma. Streaming will inevitably become better business than DVD-by-mail, but as long as that incumbent business exists, it and any disruptive business are locked in a negative-sum game. The new Netflix can grow, proportionately, very fast, but that expansion will be more than offset by resulting contractions in the old Netflix.
Most incumbent businesses take an approach that's optimal in the short term, and ignore the disruptive business, or work to slow the development of technologies that would enable it. But most business models aren't faced with disruption until they're at least 20 or so years old: this case raises additional complications. With the founder still involved, and still moved to be a revolutionary, the shareholders might be led through a short, self-imposed contraction on the path to the long-term optimum. Or maybe the doomed, hidebound business that's so last decade can be walled off from the revolutionary project that it was built to support, given a throw-away name and some risk-averse management, and promptly outmaneuvered until it's deadster.
It's tough to please investors in either scenario, though,or to maintain a good public image. It would be sad and traumatic, but maybe the way Mr. Hastings can realize his streaming plans, without making things too much worse for those who've come to depend on DVD-by-mail revenue, is to resign, craft a new startup, poach the best talent, and maybe acquire his old business with his new one after nature takes its course. I bet he knows a few good angel investors. I just hope to keep my queue.