Product Cannibalization ….


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:

  1. 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.
  2. 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.
  3. 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

15 thoughts on “Product Cannibalization ….

  1. Excellent article, Gopal. At MIT Sloan, when we study innovation management and the challenge companies face in transitioning to the newer and more disruptive S curve of adoption, NetFlix promises to stand out as an exception. Arguably, one of the things that has helped is many of their customers like me have already got accustomed to the technology/concept of Instant Streaming (and experienced the frustration of a good movie only being available by mail!). If you’re interested in learning more, I recall that Bain & Company’s Media practice speaking about some interesting work in this space and may share insight through some articles

  2. We had a similar experience with telus. A few times we’ve been called by them and switched to lower cost plans due to our usage patterns. For netflix, streaming is going to simplify their business, reduce inventory and get them more customers. Great strategy. As a recent streaming subscriber, they’ve added tons of movies over thelast few weeks which is great since, in Canada, their initial streaming offering was not great.

  3. Although I understand why Netflix is doing this, I always felt the order by DVD was a distinct competence of Netflix. No other company had been able to replicate it, not even Blockbuster. I am afraid they are making their distinct competence rather thin now. As soon as someone like Sony, Amazon. or Itunes gets actively in this game (instead of as a hobby), it is going to become a commodity business which is never good news.

    I strongly believe Netflix was not in a commodity business (Blockbuster was). If competition gets streaming right including video codecs which require even lesser bandwidth, it is going to become even more difficult to be different. Add to that buying power for the competition and you really are wearing your distinct competence thin. And so the move might save Netflix some costs, the long terms effects depend on how they innovate with this. Interesting Times huh Gopal!

    1. Pranav – absolutely, it is going to get interesting. But the advantages that Netflix has its 17 million subscriber base that is already aware of Netflix, does not have to buy anything to stream (if they have gaming consoles, new internet enabled TVs etc.). I can already take advantage of the hardware I have. Don’t have to buy Apple TV etc. Whether Sony, Amazon etc. will be able to beat Netflix on this remains to be seen.

      Commodity businesses still have a lot of margins to be earned in them – look at Zappos – who thought you could earn that much money selling shoes on the internet. I think Netflix has a loyal following and hence if I were bet on one company to pull this off, I will pick Netflix. Agree?

      1. I agree with you on the fact that commodity markets can have decent margins no doubt. My problem is becoming just like any other player in the market. As someone below points out, if they can maintain the thought leadership, they will maintain the market leadership.

        However streaming has several other parameters two of which are:
        1. Servers and Bandwidth
        2. Pricing (both buying and Selling)

        With both 1 and 2 I see Sony for e.g. or Apple for e.g. having an upper hand than someone like Netflix (no disrespect to the Internet Darling here). Add to this expertise in handling mainstream markets (not just the early adopters) and I see the “Chasm” wide open for them right now.

        I for one love Netflix and what they bring to the table. But at the same time, I don’t mind buying from Amazon or the Sony Cartel if they were to give me the same service at a lesser cost without me having to figure out anything. Again maybe just one person’s view here but I just don’t see a differentiation in their streaming strategy as they had with the physical media one. And so I wonder whether “punishing” their traditional customers was the right way to go!

  4. I agree that NetFlix is repositioning itself. Cannibalization might be a strong term IMO. They are pushing their customers to where they want them not indiscriminately killing a product to survive. A weak parallel could be drawn between how software used to be delivered via disk, CD, and now just downloaded.

    To Pranav’s comment, I see NetFlix finding the Blue Ocean. The market is going to move. By NetFlix being in the front they maintain their customer base. This is what Blockbuster failed to do 5 to 7 years ago. If NF can maintain their thought leadership then they will probably be introducing the next shift in another 3 to 4 years as well.

    My only question on this move is did NetFlix leave some money on the table? Why $8? I think they could have gotten at least $12 or $13 out of the switch. If it is heading toward commoditization, why not start high and then ride it down as new players enter to protect your market share. Although, maybe they chose to start low as a barrier to entry for the new players – meaning there is no money to be made here so don’t try and undercut NetFlix.

    1. The reason I called it “cannibalization” is because they were pushing customers to a product that costs 1/3rd less. Even when software went to electronic downloads, the price remained the same (actually in some cases, customers had to pay $10 extra to get it on a CD). So the vendor kept all of the profits resulting from electronic distribution. In this case, as a customer of Netflix, it is passing on the savings to me while it reduces its cost as well.

      In terms of why $8, you make a good point on it being a possible barrier to entry.

  5. Excellent points Gopal. Another thing to consider for Netflix is that it is positioned well for streaming live TV. Or at least, streaming current show replays. I just purchased a new bluray player and it came with 11 free weeks of Hulu Plus. I am giving it a try, but buffering is a huge issue. I investigated the problem on Hulu’s forums and it seems that Hulu has turned a blind eye on the problem. Many people in the posts are begging Hulu to talk with Netflix engineers to help solve the issue. It seems to me that Netflix has a call to action now. Line up licensing rights and add another $7-9 per month subscription package to their offerings.

    1. That is interesting to hear Therese. Netflix streaming is just awesome. There is no delay whatsoever and the quality is outstanding. I used hulu today for the next time on the computer. I was tempted by hulu plus but will not bother with it given your experience.

  6. Gopal – great post. LIke you, I got the same invitation from NetFlix and said, “well it’s about time.” I applaud companies who aren’t afraid to cannabilze their product portfolio as they understand the customers needs, have discovered market problems they can solve and are maintaining a competitive advantage. Too bad Blockbuster and other companies in this category along with countless others missed the class on INNOVATION.

  7. Netflix has stopped ordering classic titles on Blu-Ray to save money for their millions spent on streaming. I expect all Blu-Rays to be next, then all DVDs. For now, nothing rivals the clarity of Blu-Ray and that’s what I want for my home theater. I’m an old dude and I want the classics. Unless I see a change immediately I will go over to Blockbuster. I hope Blockbuster sees this as way to make a comeback. They still carry the Blu-Ray restorations. Therefore here’s one flaw in the Neflix plan. They are also ‘cannibalizing’ their loyal customers who have been with them from the beginning.

    While I see the advantages, I don’t like streaming. I suggest you rent Rollerball 1975. It tells of a future world in which all information is kept “safely” in a single computer, or a server as we’d call it now, by The Corporations. I admit the internet has made all of this very diverse, but can we really be sure it will always be this way? Would you want to have all books and movies under central control, and none on your shelves?

  8. Great post, Gopal.

    One thing to note is that in the case of Netflix, this isn’t a reaction to a shift they are seeing in their market place but rather it is solid execution of a long term strategy that they’ve had in place since the beginning. I’ve seen interviews with the CEO where he has stated that from the beginning the plan for Netflix was streaming. Hence Netflix, rather than DVDs-by-mail or something like that.

    You can look at their moves over the last few years and almost draw up what must have been sketched out on their whiteboards in the early days: acquire the customer base and make traditional channels obsolete by mastering the delivery process, build relationships with studios & build out library, leverage these relationships to start building out streaming library, build partnerships to get Netflix streaming devices in as many homes as possible, now shift the customer base over to streaming and take over the world as Gopal mentions in this post.

    Awesome example of executing on a long term strategy! Would be so much fun to be a part of!

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