Netflix announced today that they would no longer spin out the DVD rental business, which was to be called Qwikster. Too cute a name, for such an insult to Netflix's loyal customers. Reid Hastings, Netflix's Chairman, decided to spin out the declining DVD business to shield the growing streaming business from the resulting perturbations of a sunsetting business. His investment bankers undoubtedly told him that the two businesses trading separately would generate a higher overall enterprise value than if they remained bundled. Nice thinking, but what about the customers?
True, most businesses, if traded separately, do result in higher valuations, such as conglomerates or mutual funds. However, NFLX simultaneously made the product 60 percent more expensive, and less convenient to the customer. Lose-lose. This was not lost on Wall Street, which promptly rewarded Netflix with a decline in stock price from a high of 294 in July to 111 today, three months later. That's a loss of close to $10 billion in market value. Ouch.
And it's not as if Netflix has no competition. There are plenty of giants nipping on its heels: cable companies, Amazon, iTunes, Walmart, Blockbuster. This sort of imperious, unilateral, ill-advised decisions are what competitors dream about. And capitalize on. If I were Jeff Bezos, I would immediately add a DVD service to my streaming offering, and look to bring Netflix to its knees.
Reid Hastings seems to have dug in his position. He is right long-term, but he is early. There are a lot of moves that will be played out in the marketplace before the DVD becomes the dinosaur. Being early is the same as being wrong.