Rental service

Netflix Inc. (Netflix), a subscription-based movie and television (TV) show rental service, offered content
to its subscribers either via DVDs delivered by mail or through Internet-based streaming. Netflix’s 2011
third-quarter financial reports confirmed some widely anticipated negative news. Netflix, which depended
on perpetually increasing its subscription base, had lost 800,000 customers.2
While this loss represented
only 3.4 per cent of its 24 million patrons, the company had never suffered a decrease in its customer base
(see Exhibit 1). Alarmingly, this contraction resulted in a near 9 per cent hit to the company’s earnings-pershare, which dropped to US$1.163
per share from $1.27 per share in the previous quarter.4
This situation was compounded by the fact that it was not caused by market trends or the slumping world
economy, but by Netflix itself. In July, just three months prior, Netflix had increased customers’
subscription fees by 60 per cent. Netflix was at a crossroad; the path it chose could affect its future. Should
it return to combining the two services or continue with two separate services and live with the
consequences?
While the price increase seemed extreme, Netflix faced rising costs, particularly in acquiring content.
Netflix’s second change, made several weeks earlier, in September, was to split its DVD mail-order service
(renamed Qwikster) and streaming video service (remaining as Netflix). Reed Hastings, Netflix’s chief
executive officer, stated, “Streaming and DVD by mail are becoming two quite different businesses, with
very different cost structures, [and] different benefits that needed to be marketed differently, and we needed
to let each grow and operate independently.”5
Netflix needed to differentiate the two services, ensuring that
each had the latitude to rightfully respond to customers’ changing desires.

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