Netflix just announced that they are spinning off their DVD-rental-by-mail service under a new brand Qwikster while the streaming service retains the Netflix name. Many commentators have duly noted Netflix’s boldness in leaving its cash cow behind and looking to the future, a true example of a company facing up to the Innovator’s Dilemma.
However, this latest change serves a purpose beyond merely signaling Netflix’s future direction to customers and investors. Namely, Netflix is setting itself up to offer premium pricing options for its streaming product. The company has already been burnt by customer confusion stemming from its most recent pricing changes. Netflix knows it needs to clearly delineate the two product offerings to be able to say “pay another $10 a month to watch all Fox shows” without customers wondering they will still be able to rent Family Guy Season 3 DVDs by mail.
At $10 a month unlimited streaming is a great deal. The cable plans that that Netflix’s service replaces run around $40-50 which means there’s a lot of consumer surplus Netflix can absorb to widens its product offering. As evidenced by the latest Starz loss, Netflix needs to make more compelling bids for streaming rights and offering premium streaming packages is the key to that. I for one can’t wait.
