Netflix is spinning off its original DVD-by-mail business into a company called Qwikster, so that it can focus on its online streaming video business under the Netflix brand. The two companies will have separate websites, billing systems and become truly divorced. But are the decisions that need to be made for the online streaming business to be successful really not compatible with the decisions that need to be made for the offline DVD-by-mail business to be successful. How different can the two businesses be?
Research done by Achal Bassamboo, at the Kellogg School, as well as Sunil Kumar And Ramandeep Randhawa on the surprising secret to Netflix's runaway success provides a clue:
Their core discovery is that Netflix’s unique model means that the service has to stock far fewer discs than it would if it imposed late fees on customers. In fact, they found that the longer Netflix allows customers to keep discs, the more profitable the company could be.
There is even evidence that Netflix maximizes its multiplexing benefit by encouraging users to hold on to their rentals for as long as possible. A class action suit against the company, resolved in 2005, uncovered a practice called “throttling,” in which Netflix would take longer to send discs back to customers who returned them at a higher rate. The company also eliminated a once-popular feature of the site, a page of discs called “Releasing This Week,” which had the effect of encouraging many customers to put new releases at the top of their queue.
The DVD-by-mail business's success depends on encouraging existing customers to not return their DVDs as quickly as they otherwise might. This affects decisions such as what is featured on the front page of the website, as well as how quickly the DVDs are dispatched to the customers.
In contrast, a nascent, new online streaming business, which is still in the growth stage, needs to lure customers to subscribe by getting their attention with the latest, hot new content. Again, this affects decisions such as what is featured on the front page of the website, as well as the company's readiness to stream this content to the user.
As separate companies, the companies can make the decisions they need for each to succeed, without compromising the other.