If you haven’t heard Netflix has decided to split in two.  One half will be focused on Streaming (and keep the Netflix name) while the other will focus on Physical DVD rentals (under the name Qwikster).  This is a decision the market absolutely punished them for and I’d like to explain why I think that is. 

(For comparison the Dow was down 0.94% and the S&P 500 was down .98%)

First lets establish some ground rules.  In theory Netflix’s stock should have gone up.  Because this move is essentially a stock split for current investors and stock splits almost always deliver short term gains due to the psychological effect.  So it makes sense to jump on board and that’s what you saw at the beginning of the day…

But as the day went on and people discussed the move we saw a significant downturn.  I’ll admit I was one of the people who initially was in favor of the deal but turned against it.  I said this on Hacker News right after the story broke…

I think this is a good move simply because the two divisions have contradictory goals at this point.

For example, the Qwikster division should be looking at finding ways to deliver DVDs quicker (Kiosks for example). But that's not something that would ever occur to Netflix because they're focused on streaming as the future.

Which is where the contradiction comes in. It is hard to run a business unit when the goal of the company overall is to kill off your unit.

So what turned me?  There are a bunch of little issues but I think they all arise from one big issue which is the company has developed the tech media’s tunnel vision.   They are obsessed with streaming and it is having a negative impact.    Let me give you a historical example of why this is a problem. 

Remember Windows Everywhere?  In the late 1990s Microsoft had won raves for the Windows ‘95 interface and set out to put it everywhere.  TVs, Servers, and even PDAs…

Now look…I had a Cassiopeia E100, I loved that thing like a child but even I have to admit it was a ridiculous move on Microsoft’s part.  Cascading Menus on a 240 x 320 screen?  Come on!  But they were focused on branding everything Windows and giving those devices a similar appearance across the board.

Needless to say this strategy was a disaster.  So much so that Microsoft never gained a hold on the PDA market even after they corrected most of the flaws in their mobile strategy (see: The PocketPC).  It took the entire product category dying off in favor of Smartphones to give Microsoft some traction. 

But the above device, which looks ridiculous today, was a precursor to the future in many ways.  It had a color screen, high resolution graphics, a web browser, not to mention the ability to play audio and video.  All the things you see in a modern iPhone.  Compare  that to Palm who in the same time period had just introduced the gray scale, underpowered Palm V…

Yet we all know how this battle went.  The Palm V sold like hotcakes and Microsoft floundered. 

Now lets go back to Netflix.  As I said before Streaming media is almost certainly the future.  Just as color graphics, web browsing and multimedia were the future of mobile in 1999.  But Netflix is making the same mistake Microsoft did all those years ago.  Jumping too early with an immature solution.  Here are a few issues facing Netflix…

1.  Despite heroic efforts by Netflix their selection of streaming media is still sparse in comparison to their DVD business.  And it’s shrinking.

2.  Most people still don’t hook their TV up to their Internet Connection

3.  Broadband penetration is still not where it needs to be (even in the U.S. it was only at 60% as of last year)

In terms of the eventual future these issues are nothing.  In terms of growing in the next decade they’re very relevant.  Again Netflix has or will have major competition in the streaming arena.  Companies like Amazon and Walmart.   Yet they’ve decided to jettison a major strategic hedge and place an all or nothing bet on streaming.  That’s tunnel vision. 

One last point.  In his letter to customers Netflix CEO Reed Hastings said this…

Companies rarely die from moving too fast, and they frequently die from moving too slowly.

I’d like to see some statistics on that.  I’ll admit my opinion on the matter is as much conjecture as his is.  But in my experience plenty of companies die by moving too fast.  In fact what usually happens to those companies is they blaze a trail and then make it easier for their competitors to follow because they absorbed all the mistakes that would be spread across the industry.