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Why Netflix Is Smarter Than Its Customers

Rick Newman

Is it New Coke? Or the iPod?Video-rental service Netflix has provoked a consumer firestorm--and probably a few business-school case studies--with its recent plan to split its operations in two. Its traditional business of delivering DVDs by mail will henceforth be known as Qwikster, while "Netflix" will be reserved for the service that streams video over the Internet. Customers used to getting both services bundled together will now have to choose one or both--and deal with separate bills and websites.[See why big companies are axing jobs.]Netflix CEO Reed Hastings has butchered a sacred cow by changing something most customers like just the way it is--his DVD-by-mail service. Once they've chosen a new Netflix plan (or bolted for another service), most customers will settle into their new routine and stop complaining. Still, consumers are notoriously fickle about things that corporate executives often overlook, which is why Netflix's subscriber base has fallen for the first time in its 14-year history. The sudden smackdown of an Internet darling suggests that Qwikster could become the New Coke of the 21st century: a change that customers didn't ask for, which ends up a total flop.But my bet is that the new Netflix strategy turns out more like the iPod, which reinvigorated Apple and began a long shift away from a declining business toward a more promising and futuristic one. Hastings is famously fixated on obsolescence and the speed with which companies can sink in the digital era. "You hear about companies getting long in the tooth," Hastings said at an industry conference earlier this year. "All of these innovations are going on every day, all around you. One day, someone could overtake you."In a blog post explaining the latest change, Hastings mentioned AOL's dial-up service and the now-defunct Border's bookstore chain as examples of how companies cling far too long to past strategies that quickly become outdated. Netflix itself helped push the Blockbuster video-rental chain into bankruptcy, helped along by Blockbuster's own embrace of an antiquated brick-and-mortar strategy that dragged the company down like an anchor, while more nimble competitors soared.[See how Netflix helped kill Blockbuster.]Hastings is shrewd to focus so intently on the future. For the last 15 years, the rapid pace of innovation and the deadly sin of waiting too long to change have been the dominant story in the global economy. Companies like Apple, Google, Facebook, IBM, and Amazon have become market leaders--and stayed there--because they innovate relentlessly and abandon old ideas when they're no longer useful. Laggards like Sears, Eastman Kodak, Hewlett-Packard, General Motors, and many companies that no longer exist tend to milk past successes too long, while stutter-stepping nervously into the future.The same dynamic applies to individuals in the workplace. There's plenty of opportunity for people who keep their skills up to date and find fresh ways to enhance their value in the marketplace for talent. But millions more expect a prosperous future while relying on the skills of the past. Inevitably, they're the ones who fall behind, earn less, get passed up for promotions, and all too often end up in the unemployment line.Hastings is so focused on the future, in fact, that he anticipated the obsolescence of Netflix's basic offering from the moment he helped start the company in 1997. Even then, Hastings foresaw that high-speed broadband would replace the dial-up service popular at the time, and that streaming over the Internet would eventually become the most common way people watched video. He has said repeatedly that the firm is called Netflix--rather than Mailflix or DVDs By Mail--because of its mission to deliver video over the Internet. Establishing the mail service was merely a bridge strategy meant to establish a brand name and customer base until video streaming took hold.[See 4 lessons from the demise of Borders.]There have been several developments Hastings failed to anticipate. At least twice, for instance, Netflix developed and then killed video-player devices, because the advent of YouTube and other types of technology made them obsolete. Even now, there's a mad scramble for pole position in the market for home entertainment among traditional TV networks, cable companies, the Redbox kiosk service, and Web providers including Netflix, Hulu, Apple, Amazon, and Facebook. Nobody's sure what the prevailing platform will be. Even though Netflix dethroned Blockbuster, there's no guarantee it will end up one of the ultimate winners.But Hastings has clearly been right about the advent of video streaming, which is just getting started. The problem may be that he's too far ahead of his customers. Some people obviously stream video today, especially young viewers. But many still don't, and people don't like to be forced to change. They'd rather do it at their own pace. Apple is a phenomenal success because it has mastered the art of guiding people toward delightful new experiences while allowing them to feel the discoveries are their own. Netflix has proven to be clumsier. It got impatient while trying to guide its own customers toward video streaming. It's trying to force viewers to adopt the technology of the future, instead of deftly helping them migrate to it on their own.Hastings' vision, however, isn't just for Netflix in 2011 or 2012. It's for Netflix in 2020 and 2030. That's why the Qwikster episode is most likely a stumble, not a face-plant. Sooner or later, Qwikster will be a quaint throwback to the past, like eight-track tapes and Kodachrome. Many Netflix customers may not know that yet, but Reed Hastings does. He just needs to wait until his customers catch up.Twitter: @rickjnewman-- Check out the top ten states that are losing business. -- See 10 ways to create jobs. -- Read about 11 countries that make America look good.