Product Cannibalization ….
November 28, 2010 15 Comments
Last week, I got mail from Netflix indicating that my subscription fees was going up by $3 a month from $20/month to $23/month. They suggested that I instead switch to $8/month internet streaming plan. They mentioned that they were fast expanding the library of movies available via instant play. I switched to the $8/month plan immediately – we were getting less and less DVDs by mail and were watching more and more movies via streaming using our Wii console plus we did not care if we had to wait to watch the latest movies. So it was a perfect solution for us and Netflix.
As a software product manager, of course it got me thinking more. What is happening at Netflix to me is product cannibalization, except that they were doing it to themselves. They were pushing their own customers from their bread and butter business of DVDs by mail to another product of theirs that costs 1/3rd less. Imagine that. And Netflix is a publicly traded company that has to live up to Wall Street’s expectations. I commend Netflix for doing what not many companies will dare to do.
I can count the following advantages for Netflix from pushing customers to streaming:
- Scalability – you do not have to increase buying DVDs, increase warehouse space to handle all of the DVDs and of course the increased shipping costs as your customer base grows. Internet streaming has no touch costs and no shipping costs involved.
- Possible international expansion – more and more people overseas have high speed internet connections. They are now a potential market – instant scalability again without having to worry about huge infrastructure and operational costs, import restrictions, fear of not getting DVDs back etc.
- Response to competitive threat – technology for high speed streaming is here. This is a big threat to Netflix’s DVDs by mail business – if they don’t adapt, they could go Blockbuster’s way.
The DVDs by mail business is expected to be around for a long time, but Netflix is seeing the writing on the wall and is positioning itself to take advantage of the new technologies and retain its leadership position in the industry. I am quite impressed by what they have done and will continue to remain a loyal customer of Netflix. I am sure it is fun to be a software product manager at such a company.
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Image: Courtesy of netflix