Netflix Moves in the Correct Direction

Even if no one else understands the move Netflix made today in separating their DVD business and streaming business.  The plan was set in motion months ago when they changed their pricing models forcing streaming customers to sign up for a separate DVD package.

Qwikster, Netflix’s new name for their DVD business, was set up to deal with an antiquated Supreme Court ruling in 1908 referred to as “first sale doctrine.”  The doctrine says:

The doctrine allows the purchaser to transfer (i.e., sell, lend or give away) a particular lawfully made copy of the copyrighted work without permission once it has been obtained.

This is the basis for Netflix’s DVD business, but in the streaming world the rules are different.  In the streaming world, Netflix has to negotiate the rights to stream each movie.  Talking with friends at the company over a year ago, it sounded like a nightmare to do this, and I am not sure how it can scale.

But ignoring the scaling issue for a second, the real reason Netflix had issues making streaming the core business was that the deals that were being negotiated were based on the number of Netflix users (not streaming users, ALL USERS!).  By making users choose which format they want to consume media, it allows Netflix to be able to more easily negotiate the streaming rights to movies.  The argument was that too many Netflix users who were only consuming media via DVDs clicked a checkbox to get streaming too even though they never used it.

While everyone is talking about Netflix’s blunders and their tanking stock price, I hold a contrarian view that they are moving the in the right direction.  Bottom the ship with regards to registered streaming users (Netflix filed papers with the SEC they were going to stop reporting this number purposely), and then pay the streaming rights for the people who really want streaming which will control Netflix’s costs.

Its a dangerous strategy, especially the way Netflix has gone about executing it, but once the fervor dies down, Netflix will be in a stronger position for the future.