Why Netflix is a cautionary tale for newspapers

When Netflix (s nflx) first announced earlier this year that it was changing its pricing plans for its legacy DVD-by-mail service as a way of promoting its digital streaming business, we wrote about how this was very similar to what newspapers have been trying to do — that is, moving people from the high-cost legacy side of the business (i.e., print) to the lower-cost digital side (i.e, streaming). So what kinds of lessons can we draw from the furor over Netflix’s pricing change and the impact it has been having on the company’s revenues? Here’s a hint: they’re not good.

As Ryan Lawler reported earlier today, Netflix CEO Reed Hastings has posted on the Netflix blog what amounts to an apology to all of the company’s customers, saying he “messed up” and that the response to the video-rental company’s changes made it obvious that users felt Netflix’s actions “lacked respect and humility.” Hastings blamed himself for the negative reactions to the moves, saying he had “slid into arrogance” and didn’t communicate with users enough about the reason for the changes.

So is Netflix rolling back the price hikes that were originally launched to push people toward streaming and balance the costs of DVD mailing? No. Instead, Hastings says the company is separating its two businesses to make the contrast between them even more obvious: The DVD rental-by-mail operation is being rebranded Qwikster (a name that drew almost universal negative reaction from the tech blogosphere after it was announced) and the streaming business will continue to be known as Netflix. Hastings described his reasoning:

[M]y greatest fear at Netflix has been that we wouldn’t make the leap from success in DVDs to success in streaming. Most companies that are great at something – like AOL dialup (s aol) or Borders bookstores – do not become great at new things people want… because they are afraid to hurt their initial business. [Companies] rarely die from moving too fast, and they frequently die from moving too slowly.

DVD rental to streaming = Print to digital delivery

As I tried to describe when Netflix made its initial announcement about the pricing changes earlier this year, the transition that the company is trying to make — from high-cost legacy business to new digital-only service — is very similar to the transition that newspapers and other print publishers have been trying to engineer (with mixed success) for the past several years. Just as Netflix has, many newspapers have been cranking up the price they charge customers for the legacy product, hoping that no one will notice or that the changes will be too small to cause much of a fuss.

The problem for print publishers — one that Netflix arguably doesn’t share — is that their legacy business still produces the bulk of the revenue they pull in via advertising, and therefore, the incentive to de-emphasize or radically downsize that part of the business isn’t as obvious. Hence, the reason why you see so many publishers opting for paywalls, which bring in incremental revenue but are mostly intended to function like a line of sandbags, keeping existing print subscribers from deserting that business for the free web.

Netflix doesn’t have to worry about the impact of its shift on advertising revenue the way that newspapers do, which is probably why it has accelerated its move, while many print publishers are still waffling about what to do more than a decade after the rise of the consumer web. All Netflix has to worry about is the impact on its customers, which is why Hastings has become so apologetic. The effect of the changes on the company’s revenue — and the resulting decline in the company’s share price — are enough to make it obvious that people don’t like the change.

Hastings is right, however, that changing too slowly can be far worse than changing too quickly. Arguably, users will eventually become used to the new structure of the service, and DVD fans will be content to use Qwikster while streaming fans use Netflix. At least the company is trying to move in the direction that has the most potential for the future — while newspapers continue to dither and hope that paywalls or all-in-one subscription services like Ongo will somehow fill the gap.

Who will be the first to spin off a newspaper?

The big problem for print publishers is that virtually none of them are going to be able to make the kind of shift that Netflix has just made: that is, renaming and effectively spinning off their existing legacy business as a separate entity — something that may even be a precursor to a sale of that business — while focusing on the fast-growing digital side. Only a few newspapers have been able to take as radical a step (including the Christian Science Monitor, which shut down its print product and went digital-only in 2008).

One media industry observer summed up the likelihood of any major newspaper making a Netflix-style move with a tweet:

Unfortunately for newspapers and other publishers with legacy businesses, they have to make the transition somehow, and the glacial pace that most of the industry has taken — which amounts to waiting for existing print subscribers to die of natural causes and thereby solve the problem — isn’t really cutting it. They can change quickly and risk the kind of customer uproar that Netflix is experiencing, or they can move slowly and be disrupted. At least Netflix is trying to disrupt itself instead of waiting for someone else to do it.

Post and thumbnail photos courtesy of Flickr users David Daniels and Shironeko Euro