When companies I love (as a customer) and admire/enjoy writing about (as a journalist) do something that seems downright crazy to both sides of my brain, like splitting up a well-known brand and its useful and well-loved website, I tend to wonder if I'm missing something.

Netflix's announcement that it would split into a streaming-only business (called Netflix) and a discs-by-mail business (called Qwikster) caught me by surprise. It's easy to miss a lot of things when you're surprised, particularly when the surprise drops after midnight on the east coast, and you stay up all night writing and talking about it.

When this happens, it's best to look for smart people with different opinions from yours, who've probably also had more sleep than you have. Here, I've gathered these opinions to make the best possible case for (and explanation of) Netflix's decision to divide itself, its web site, and its subscriber base (just on paper — we hope) in half. I've also added my (and others') skepticism.

A Streaming-Only Company With Fewer Total Subscribers Pays Less For Content

The first argument comes from Benchmark Capital VC Bill Gurley, who blogs at AboveTheCrowd.com. It has the added benefit of having been written before the name change announcement, so it's not a post-hoc apologia. Instead, by justifying Netflix's pricing change, it manages to explain what has probably led to the division:

So here is what I think happened with Netflix’s recent price change (for the record, I have no inside data here, this is just an educated guess). Netflix has for the past several years been negotiating with Hollywood for the digital rights to stream movies and TV series as a single price subscription to users. Their first few deals were simply $X million dollars for one year of rights to stream this particular library of films. As the years passed, the deals became more elaborate, and the studios began to ask for a % of the revenues. This likely started with a “percentage-rake” type discussion, but then evolved into a simple $/user discussion (just like the cable business). Hollywood wanted a price/month/user. This is the point where Netflix tried to argue that you should only count users that actually connect digitally and actually watch a film. While they originally offered digital streaming bundled with DVD rental, many of the rural customers likely never actually “connect” to the digital product. This argument may have worked for a while, but eventually Hollywood said, “No way. Here is how it is going to work. You will pay us a $/user/month for anyone that has the ‘right’ to connect to our content – regardless of whether they view it or not.” This was the term that changed Netflix pricing. With this new term, Netflix could not afford to pay for digital content for someone who wasn’t watching it. This forced the separation, so that the digital business model would exist on it’s [sic] own free and clear. Could Netflix have simply paid the digital fee for all its customers (those that watched and not)? One has to believe they modeled this scenario, and it looked worse financially than the model they chose.

WIRED: Let's suppose that Netflix couldn't convince studios to consider only its streaming customers and not its total subscriber base with its pricing and bookkeeping changes alone. Then, paradoxically, fewer total subscribers becomes a bad thing for Wall Street, but a good thing for negotiating content rights. Netflix couldn't stand that two-sided squeeze; it had to do something radical, to continue to get the best deals at the lowest rates for its customers.

TIRED: This is so handy an explanation and so much more customer-friendly than the actual apology Netflix CEO Reed Hastings offered that I can't believe Hastings wouldn't use it himself, even if it weren't actually true. You don't even have to paint the studios as bad guys. Everyone would infer that anyways.

Let me fix your messaging for you, Netflix. Hastings could have said:

We're truly sorry that we had to raise prices without getting more content in return. But we want you to know the truth: we're working as hard as we can to make sure we never have to do that ever again. This split is part of that. We don't want streaming subscribers to pay more because of the sheer number of our DVD customers, and we don't want our DVD customers to have to pay more because we're trying to get the best possible content for streaming.

It's potentially tricky to do, but it's 1) better than just waving your hands with mysterious references to making things better, and 2) not any trickier than explaining why using a new name and a new web site will be a good thing. It also allows you to re-iterate why Netflix passed on Starz this time around: the company is laser-focused on negotiating the best possible deals for content, without any extra complication or unnecessary price hikes.

The company knew this split was coming, and would make things more difficult for streaming and mail customers; adding premium tiers for cable channels, especially before the subscriber base was fully split, was just too much.

A corollary to this idea is the argument that Qwikster, by not being tied to these acrimonious streaming negotiations, will be in a better position to negotiate deals for new disc releases. I think they probably lose at least as much in leverage with the studios as they gain in goodwill, but I'd be willing to be proven wrong.

Netflix Hates its DVD Business and Wants It to Die Quickly, Not Slowly

What's more, it's willing to use blunt force if it has to. This argument comes from tech writer Dan Frommer in a post titled "Netflix wants to get rid of its DVD business so badly that it’s changing the name… to Qwikster":

Why is this happening? Because the future of Netflix is streaming videos. Period. Not mailing them to your house via the U.S. Postal Service, but delivering them to your TV and devices over the Internet. But to get there, Netflix first has to convince Hollywood to stream its best movies, and it needs to train consumers to stream movies as a default behavior. That means making sure that the streaming business can stand on its own. And that means separating DVDs from the equation, and doing as much as possible to get everyone to stop using them, short of blatant sabotage. (What, you think the bad name, “Qwikster,” is an accident?)

"Further down the road," Frommer adds, "I wouldn’t be surprised if Qwikster breaks off completely from Netflix, is sold off to another company, or merges with another DVD service, like Redbox."

WIRED: Let's call this the "HP Kills the TouchPad" strategy. Dealing in physical things is a pain. The margins are terrible and you're at the mercy of everything from a lousy economy to scratched disks. Every analyst would tell you that a company focused on a growing, high-margin business is better-positioned than a company trying to prop up a legacy business at the same time.

VC Mark Suster makes a version of this argument in a blog post titled "Why Reed Hastings Should be Applauded for Netflix Split." Netflix was successful with one innovation (subscription-based DVDs by mail), but has to be willing to disrupt that success to move forward. It's a classic case of the innovator's dilemma, says Suster: "To win the future [Hastings] needs to attack his core assets by building new ones. "

TIRED: The trouble with this argument is that Netflix's biggest problem right now isn't its competition, but its customers. This is why I like Frommer's framing of this argument better than Suster's, because Frommer actually acknowledges that Netflix's move is explicitly customer-hostile.

The pricing change triggered a customer revolt; the impending loss of Starz content gave customers even more reason to be unhappy. Netflix is trying to address this with a move that makes investors with MBAs mildly happy and customers with pitchforks profoundly unhappy. That could turn a revolt into a full-fledged rebellion.

What's more, Ars Technica's Tim Lee, writing here for Forbes, makes a persuasive case that Netflix isn't facing the innovator's dilemma: "Disruptive technologies work by undercutting the incumbents’ business model, but Netflix is about to make itself a lot more dependent on the goodwill of those same incumbents." (Lee and Gurley also make exactly the opposite arguments about the importance of the sheer number of Netflix's customer base, so they're worth reading together.)

The "HP Kills the TouchPad" solution could also leave you with HP's TouchPad problem. It turns out that people love their HP computers — and at the right price, they love the TouchPad too. Now you're caught on a bubble, wanting to get rid of a product that people suddenly remember they really like.

Finally, writing at Google+, Microsoft researcher Danah Boyd makes the best argument that with 21st-century media, the economics actually point in the opposite direction:

Why is Netflix splitting its world based on business models rather than users' mental models? They're being foolish. Where are movie ratings going to go? To the Qwikster website? Will it or won't it affect the streaming recommendations? ::faceplant:: And why the hell change the brand for the DVD delivery when DVD-only users are the least likely to understand what the changes mean? Wow for brand cluelessness.

Why is Netflix splitting its world based on business models rather than users' mental models? That's the question I can't answer either.

The fact is that if Netflix and Qwikster were already separate companies, each just as successful at their respective businesses as Netflix's streaming and DVD businesses are now, they'd probably be talking about a merger today. We'd already call Qwikster "the Netflix of discs-by-mail," or Netflix "the Qwikster of streaming video."

After the merger, the two companies would complement each other's offerings, synergize their brands, make subscription and queue management easier for subscribers, and use the extra resources to negotiate better deals for content. It would be all about bringing Netflix's simplicity to Qwikster, or vice versa. All of the Wall Street/Silicon Valley logic would be pointing in the opposite direction.

Maybe that's what's so alarming about Netflix's market struggles right now: it signals that even for one of the most successful and innovative companies of the past decade, the arrows to the future point in opposite directions.

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