Sanchez on Netflix

Lynne Kiesling

You probably received the same apologetic email from Reed Hastings of Netflix that I did on Monday, stating the impending decision to split Netflix’s streaming business and its DVD subscription business. Foresightful or bad business decision, PR nightmare, or all of the above? The best analysis of its likely drivers and impacts is from Julian Sanchez:

Just as many people spend hours “watching TV” rather than watching any particular show, people often just want to “watch a movie”—de dicto, rather than de re, as the philosophers say—or rather have the option to watch any one of a number of movies, more than they want to see any particular one.

Julian goes through a good analysis comparing buying a DVD, getting a DVD from Netflix, or streaming a movie, both from the consumer’s perspective and from the studio’s perspective, and how all of these affect Netflix’s business model. Although he doesn’t couch it in economic terms specifically, his analysis hinges on the differences in option value of the various alternatives to consumers, and how both the studios and Netflix/Quikster can profit from these different option values and changes in them. Very thoughtful analysis.

My Kellogg colleague Sandeep Baliga also comments on the decision from a more operational and strategy perspective.

One thought on “Sanchez on Netflix

  1. The “value” depends upon the reliability. I have had a few issues with Netflix DVDs that have been mildly annoying. But although I like(d) the optionality and timeliness of streaming, I had way too many problems that were extemely annoying, and the problems were most definitely on the Netflix side of it. Overall, the annoyance exceeded the value, and I only needed the motivation Netflix provided a month ago or so to cancel. No regrets.

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