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6/25/2009
08:26 AM
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Is Netflix's Core Business Doomed?

Netflix CEO Reed Hastings believes his core business of DVD rentals is doomed, somewhere around four to nine years from now, so he wants to migrate his brand to the transmission of digital content. Is he right?

Netflix CEO Reed Hastings believes his core business of DVD rentals is doomed, somewhere around four to nine years from now, so he wants to migrate his brand to the transmission of digital content. Is he right?I ask because I've lived through a few of these digital transformations, having worked at Limited, Inc. and Blockbuster in the early 1990s. Back then, Internet distribution was widely believed to be just around the corner, and industry and stock analysts demanded evidence that the companies were ready to change their business models.

Instead, both companies made the mistake of telling the truth: things weren't happening like the experts thought. The headlines were catchy, but the digital wave was a decade away, not years. Maybe more.

Those brands were punished mercilessly for having the audacity to defy the Conventional Wisdom. Worse, because the digital hype was presented as such a threat, the companies probably didn't give it all of the thoughtful attention it deserved. And the attention they did give it was sometimes a distraction from the other factors that needed strategic focus.

They were right, though. In fact, it turned out that the real threats to those businesses were distinctly conventional: in bricks-and-mortar retailing, it was lack of merchandise differentiation, and a collapse of the premium pricing charade. For Blockbuster, it was Netflix, which had a new idea for distributing old media.

We now know that digital tools -- whether consumer-facing, or intended to make the supply chain smarter, faster, or better -- are additive, not a replacement. Consumers still like to go to physical stores to buy clothes, and folks like (or simply know how to use) rental DVDs. And they're going to be doing it for many, many years to come.

So what's Netflix's CEO talking about?

My guess is that he has learned a lesson from history: give the people what they want, and that includes the digerati and their cheerleaders in finance and the media. We may all get our movies via the Internet someday, but by the time that day arrives, we could be consuming entertainment other than movies altogether...via devices beyond the web interface of screen and controller.

In the meantime, he has to give the prognosticators what they want. It's a heckuva a lot easier than trying to educate them on what really might be going on.

So what do you think? Is Netflix preparing for a real future, or simply playing to the crowd that makes its money imagining it?

Jonathan Salem Baskin writes the Dim Bulb blog and is the author of Branding Only Works On Cattle.

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