Why Qwikster Will Die Quickly

Sep.20.11 | About: Netflix, Inc. (NFLX)

Organizational design - that is what makes for success or failure as companies grow. Netflix's (NASDAQ:NFLX) latest decision to split itself into two separate firms or as two separate divisions managed separately is bound to be a disaster. The only question is how quickly will Qwikster (as the DVD-by-mail service division will be known) die?

The executives running Qwikster would have strong incentives to prevent the company from making the DVD-only titles in its catalog available for streaming for the Netflix division's customers (the new streaming-only division will be called Netflix). Why?

Nobody could possibly argue that streaming is preferable to getting DVDs via email - especially with all sorts of devices letting you watch Netflix on your big-screen TV. Why would you be a DVD-only subscriber? I can only think of that making sense if you live in an area with poor internet speeds. Apart from these subscribers, everybody else would either opt for Netflix+Qwikster or Netflix alone.

If more and more titles become available for streaming, then customers who have signed up for the combined plan (Qwikster + Netflix) will see less and less value for the Qwikster part of the service and start canceling this in droves. So Qwikster-subscriber growth completely depends greatly on exclusive content. I think we have established now that there are clear incentives for the Qwikster executive team to start pushing for exclusive content for their division.

What if the Qwikster team does get a lot of exclusive content not available for Netflix-only customers? Now here is one more weird thing that the Netflix management has done - it will make the services available on two separate websites. So a Netflix customer will not be able to see whether or not a film that he wants is available on DVD. This is going to be a little irritating for customers who subscribe to both. They have to check two websites to browse for content. On the plus side, if a customer doesn't subscribe to Qwikster, this will make him less prone to be irritated by the movie being DVD-only. But the flip side is that there is nothing to entice any Netflix-only customers to start opting for Qwikster as well. So there goes the chance to start cross-selling...and without cross-selling, customer acquisition costs will be higher. It would also be higher than it has been in the past because the value of the new Netflix+Qwikster/ Netflix-only/Qwikster-only is definitely lower than the old all-you-can-eat plan.

Oops - heads you win, tails I lose...there goes the Qwikster executive team.

I see Netflix's subscription numbers being seriously threatened. Amazon's (NASDAQ:AMZN) video-on-demand could pose some serious threats, especially with their amazing offer to bundle Amazon Instant video with Amazon Prime at no extra cost.

Disclaimer: I was a Netflix fan who now became a streaming-only customer and I go the local DVD library for content that I can't find on Netflix. I don't own Amazon stock but would love to work for them managing their video streaming service..

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.