Yale School of Management

Netflix and Qwikster

Overview:

In 2011, Netflix announced changes that observers characterized as among the greatest missteps in the history of corporate strategy. First, the company significantly raised prices. Then, Reed  Hastings, the founder and CEO of Netflix, described plans to split the company between streaming and disc rental, spinning off the DVD-rental business to a new entity called Qwikster. The outrage from customers and investors was extreme. Within two weeks, Hastings reversed the plan to split the company (though maintaining the price increases). During the debacle, Netflix lost 2 million subscribers and the stock dropped more than 75 percent in value.

Before his controversial move to split the company, Reed Hastings had built a reputation as a savvy businessman. He founded Netflix in 1998 as a DVD rental business, which allowed subscribers to order discs online and then receive and return the DVDs through the mail. By the end of 2010, Netflix had grown to 20 million subscribers, gained revenues of over $2.1 billion, and delivered net income of $160 million. The company had crushed its bricks and mortar  competitors in DVD rental. Other competitors that had tried to mimic Netflix’s net and mail service had failed to find subscribers and had similarly fallen by the wayside.

In addition to its success with DVDs, Netflix had established a growing online video-on-demand service. Hastings believed internet streaming would be the future of content delivery and increasingly described Netflix as "a streaming company, which also offers DVD-by-mail." Many investors seemed convinced – by early July 2011 the stock price had reached $304, giving Netflix a market capitalization of over $16 billion.

But then came Hastings’s disastrous decision and its reversal. In the year since, Netflix had not managed to convince investors that it knew the way forward. Observers noted that the company was attempting to compete in two fundamentally different businesses with the same list of subscribers. While the company was the leader in the physical rental of DVDs, the streaming video space was becoming more crowded, and Netflix’s success hardly seemed assured. Could Hastings find some way to leverage success in one type of business to overcome the obstacles in
another?

Format:
Cooked, document
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Teaching Note:
No
Suggested Citation:

Sharon M. Oster, M. Keith Chen, and Jean W. Rosenthal, “Netflix and Qwikster,” Yale SOM Case 12-019, August 15, 2012

Keywords:
  • United States
  • Media
  • Distribution
  • Streaming Services
Perspectives:
  • Competitor/Strategy
  • Customer/Marketing
  • Innovation & Design
  • Operations

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