Netflix--Next Steps?

Booz & Co.'s Strategy + Business published a spring feature titled "Netflix Wasn't All Wrong," critiquing the controversial actions that Netflix took in 2011. Here's the conclusion:

• Netflix should have split its rental operations to separate DVD-by-mail and downloadable entertainment, because these are different businesses requiring focus for success. In fact, Netflix retracted this decision after a firestorm of customer complaints.
• The pricing change--separate monthly subscription fees for by-mail rentals and streaming rentals--was the right way to go. Netflix stuck to this pricing arrangement.
• Netflix needed to better understand customers' true attitudes and behavior before making brand changes. The company didn't appreciate the depth of attachment to the Netflix brand, one reason why Qwikster (the brand for the proposed by-mail side of the business) was not embraced by customers. The way Netflix communicated the changes didn't help, either.

So where does Netflix go from here? Remember, this is a company that began life in 1997 and successfully fended off rent-by-mail competition from Blockbuster and Walmart.

The company did lose perhaps 800,000 subscribers after its botched attempt to separate by-mail and streaming subscription operations. But as of spring 2012, Netflix has more than 26 million streaming subscribers and 10 million by-mail subscribers worldwide. Netflix's Reed Hastings has set a long-term goal of attracting more than 60 million U.S. subscribers to its streaming service. Some analysts doubt whether this ambitious goal can be achieved, especially in the current competitive and economic environment.

Netflix's next steps depend, in part, on what competitors do. One serious competitor is Redbox, which rents movies and videogames through kiosks in local stores--very convenient for impulse decisions when customers prefer physical disks to streaming. Hulu is another competitor for customers who don't want to bother with disks at all. Apple TV may have some tricks of its own shortly. Finally, there's Amazon's Prime Instant Video service, which has been gaining steam lately--although it has far fewer movies for rent than Netflix offers.