Two Businesses Under One Roof
You run a subscription entertainment company with two businesses. One delivers physical discs by mail, profitable but certain to decline. The other streams video over the internet, growing fast but facing sharply rising content costs.
How should you separate the declining business from the growing one, and how fast?
The situation
It is July 2011. Your company has two businesses under one subscription. Its original business delivers DVDs and Blu-ray discs by mail. It is profitable, but it is expensive to run, with warehouses and postage, and you are certain it will decline as internet connections improve. Its newer business streams films and television over the internet. It is growing fast, but studios have begun charging far more for streaming rights, and content costs are rising sharply.
Most customers pay one price, around $10 a month, for a plan that includes both a disc at a time and unlimited streaming.
What you know
You believe streaming is the company’s future and that the two businesses now have different economics and different futures. Managing them together blurs both: the disc business absorbs attention, and the bundled price hides what each costs. Your company has a history of bold moves that customers initially questioned and later embraced.
What you don’t know
You do not know how customers will react to paying separately for each service. You do not know how quickly disc demand will fall if it is priced separately, or how much streaming content you will be able to license at the new prices.
The voices in the room
Some argue the separation is overdue and should be done decisively, so that streaming gets the focus it needs. Others warn that customers love the bundle and will feel cheated by a large price increase. Some prefer a gradual transition that protects existing customers’ prices.
What happened
The company was Netflix. On 12 July 2011 it announced separate plans for discs and streaming; customers wanting both would pay $15.98 a month instead of $9.99, an increase of up to 60 per cent. The reaction was intensely negative. On 18 September, chief executive Reed Hastings published an apology, “An Explanation and Some Reflections”, and announced that the disc business would become a separate brand, Qwikster, with its own website and accounts. That deepened the backlash. On 10 October Netflix cancelled Qwikster, keeping both services on one website, though the new prices stayed. In its third-quarter report, Netflix disclosed about 800,000 more subscriber losses than expected, mostly among disc renters, and its share price fell steeply over the following months.
Netflix kept its focus on streaming, launched its first major original series in 2013 and became the world’s largest subscription streaming service. It shipped its last DVDs in 2023.
Judging the decision apart from the outcome
This case shows why outcome and process must be judged separately, and why a single decision can contain both good and bad judgement. The strategic reading, that discs were declining and streaming needed focus, was correct and proved enormously valuable. The process of implementing it was poor. A large price increase imposed at once, followed within weeks by a separate brand that added friction for customers, ignored how customers experience losses. Hastings himself later wrote that he had slid into arrogance based on past success.
The outcome grade is Mixed because the short-term damage was severe and the long-term direction was right. The process grade is Weak because the problems with execution were foreseeable: customers’ attachment to the bundle and the friction of separate accounts were visible risks. The memo page on this site grades the Qwikster announcement itself as Backfired; this case looks at the whole separation.
What a good process would have weighed
A good process would have separated the strategic decision from its implementation and tested the implementation with customers: a phased price change, protection for existing subscribers or a simpler separation within one brand. It would also have recognised that loyal customers’ goodwill, built over years, is an asset that a sudden change can spend very quickly.
Sources and limitations
Prices and dates are from Netflix’s announcements and the memo on this site. Subscriber losses are as reported in Netflix’s third-quarter 2011 letter. The quoted phrase about arrogance is Hastings’s own description, as reported. Assessments of what a gradual transition would have achieved are counterfactual.
The reveal
Netflix, 2011
Split the plans now, raising the price for customers who want both, then move the disc business to a separate brand and website.
Mixed
The company raised prices and split its plans, then announced a separate brand for discs, which it cancelled within weeks after a fierce backlash. It lost about 800,000 disc subscribers in one quarter and much of its market value for a time, but its focus on streaming laid the foundation for its later dominance.
Weak
Judged on what could be known at the time, separately from the outcome. See moral luck.
The forces pulling at the people deciding
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The strategic reading, that discs were declining and streaming was the future, was correct. The way the change was imposed on customers was the problem. Judging the whole decision by either part alone misses the lesson.
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A price increase of up to 60 per cent was felt as a loss by customers who valued the existing bundle. The company weighed the economics of the two businesses more than customers' experience of losing something.
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Customers responded with loud voice, online and in the press, and with exit, cancelling in large numbers. Both signals arrived together, and the company reversed part of the change within weeks.
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Years of successful bold moves can make a leadership team more confident about how customers will respond than the evidence supports. The chief executive later wrote that he had slid into arrogance based on past success.
Signals that were visible at the time
- Customers had paid one price for discs and streaming together for some time.
- Studios were charging much more for streaming rights, so content costs were rising quickly.
- The disc business was profitable but expensive to run and certain to decline.
- Separate brands would mean separate accounts and websites, adding friction for customers who used both.
Being right about where the market is going does not entitle you to drag customers there on your schedule.
Follow the thread
Connections
Where this comes from
Sources
- Reed Hastings, “An Explanation and Some Reflections,” Netflix blog (18 September 2011).
- Netflix, Q3 2011 letter to shareholders (October 2011).
- Reed Hastings and Erin Meyer, No Rules Rules (Penguin Press, 2020).
Teaching this case? The teaching note has learning objectives, a 60-minute session plan, discussion questions and the key facts on one page.
Shrikant Kumar. “Two Businesses Under One Roof.” Decide case, Telos. https://shrikantk.com/decide/two-businesses/