The Ongoing Deconstruction and Reinvention of Netflix and Amazon

Both Netflix and Amazon have been in the news recently. Netflix received lots of negative feedback and press for their decision to split up their business into two separate units, Qwikster which will continue the traditional DVD by mail service, and Netflix, which will now solely be a streaming video business. Amazon just unveiled their new Kindle Fire tablet for $199 and three new Kindles to leverage its industry leading position in electronic books and challenge Apple and Netflix in the digital music and video download industry. Despite some worries about how the $199 price for the Kindle Fire will impact Amazon’s profit margin, Amazon has generally gotten good press for this decision. Some analysts even claim that Amazon is the only company that can challenge Apple in the digital platform and content download market segment and rumors are flying that Netflix decision to split the digital and mail units is a prelude to Amazon buying the Netflix digital streaming business. Amazon has also started offering free video streaming of select titles for its Amazon Prime members who are paying $79 annual fee for free two day shipping.

The Darwin and the Demon article published by the Harvard Business Review provides the ideal framework for understanding and evaluating the decisions by Netflix and Amazon, in the rapidly evolving digital content and platform marketplace. In this article, the author Geoffrey Moore said that “failure to innovate equals failure to differentiate equals failure to garner the profits and revenues needed to attract capital investment.” There is no doubt that this statement is true in the rapidly evolving digital world, where technology and business models are constantly challenging internet companies to innovate or risk falling behind. At the same time, the author also provides a framework for deciding what kind of innovation aligns better with where a product is in its life cycle. In the simplest form, the idea is that disruptive, application and product innovations are key during the technology adoption life cycle, process, experiential and marketing innovations dominate during the main street phases, and business model and structural innovations are useful during market decline and product obsolescence. Lastly the author writes that “differentiation-creating innovation and productivity-creating deconstruction must be conducted in tandem”

In real life, most companies are not one product companies and hence would need to balance the need to innovate and create new product with the need to maintain legacy products and processes. This is clearly demonstrated in the case of Netflix. The DVD by mail business is clearly in the main street declining market development life cycle while the video streaming side of the business is in the main stream early part of the market development life cycle. Faced with a legacy product and a growing video streaming business, Netflix decided to radically restructure the company into two units, and prepare for the eventual spin-off of the legacy DVD by mail business into a game over scenario and milk the remaining free cash flow. At the same time, this free up resources for the Netflix video streaming business unit to continue to grow in the face of formidable competitions from Apple, Amazon and cable, phone and wireless service providers.

On the other hand, Amazon provides an amazing case study of how it has continued to modify and enhance its website platform to continue to expand into multiple areas. Starting from its historical root of selling books, cds and dvds, Amazon has expanded into a full fledged online retail outlet for almost all products, platform provider for small businesses, e-books, digital music, digital video, cloud computing and hosting, e-book readers and now tablets with the new Kindle Fire. In the process it has continue to innovate while managing to sell its legacy products – physical books, cds and dvds. No radical restructuring and announcement was necessary as it continued to add new innovative offerings to its products while maintaining its traditional business model as an online retailer. Internally, resources at Amazon must be directed at creating these new innovative offerings, but externally we hardly notice as it transitions from legacy products to new digital offerings.

The two case studies demonstrate that the transition from legacy to innovative products require the company to juggle resources internally so that the right innovation is directed at the right products. At the same time, radical external business model restructuring may or may not be necessary as demonstrated by Netflix and Amazon. My view is that Netflix had to pursue a more radical restructuring because it is much less diversified than Amazon and is essentially a one product video delivery company whereas Amazon can continue to add features and products while quietly allowing its legacy products to decline without impacting its overall performance.

At the same time, it is interesting to analyze the introduction of the Amazon Kindle Fire and other Kindles in this context. It is Amazon’s attempt to develop a new business model and platform for delivering digital content. As customers migrate away from desktops and laptops to tablets and smartphones, Amazon needed to innovate its platform from one solely based on its website, to a tablet and eventually smartphone based platform with apps that can direct users to purchase digital contents directly from Amazon. It cannot afford to allow Apple IPAD and Iphone to completely dominate the tablet and smartphone market without risking an impact on future online digital content sales and even its traditional online retail business. The Amazon Kindle Fire is a new process, experiential and marketing innovation that will help maintain Amazon’s leading online retailer position and allow Amazon to grow its online digital content business beyond e-books to digital music and video. No wonder speculations are rampant that Amazon will buy Netflix’s streaming movie video business!