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The Choice Between Netflix and Qwikster: Game Theory

Late last week, the movie rental giant, Netflix, announced that it would split its services in half. Before September, users were able to pay $9.00/month for the ability to stream any movie or TV show available on the site as well as rent a maximum of one movie at a time. CEO Reed Hastings believes that the streaming service is the future of the industry and therefore, the most integral part of the company’s success.  In a major statement on the subject, he implemented two separate fees starting in September: one for the streaming service and one for the mailing service. This resulted in a 60% price hike for members who wanted to do both options.

For any of you Netflix users out there, you may be familiar with how unpopular this choice was. Netflix’s subscribers dropped from 10 million to 9.8 million in only a few weeks, and 2 million DVD subscribers fell to 2.2 million.  As a result their stock (NFLX) took a steep dive, dropping 14.9% in one day.

Hastings later held a press conference explaining that Netflix would now be two separate entities. Netflix would be the DVD streaming service and Qwikster, the new spin-off, would maintain the company’s DVD-mailing service.  Hastings explains that “companies rarely die from moving too fast, and they frequently die from moving too slowly.”  As streaming is the future of TV and movie viewing, Hastings saw his chance to keep his company alive in the face of rapid change.

Qwikster still faces many obstacles from the unhappy subscribers. The question now is if either company can further expand in the face of this adversity.  Personally, I do believe this was the right move. Company’s that cannot remain agile and ahead of curve, fall hard and fail. Streaming is clearly the future of the industry, simply because it is more convenient. You never have to leave your house and the whole experience is cloud-based (you can log in to your Netflix account on any computer). The only question is how many users will adapt, and how quickly.

This article reminded me of Game Theory because it addresses the rewards for each person (Hastings and the Netflix subscribers).  We could establish the payoff matrix as such: Hastings chooses either to stick with the Netflix company as is (OLD) or focus on streaming and split the company (NEW), and the subscribers have the option of either sticking with the old Netflix company (OLD) or agree to subscribe to both new companies (NEW).  The payoff for Hastings if he sticks with the Netflix company is that he would keep subscribers for the time being but soon in the future would lose subscribers to streaming.  The payoff for him if he splits the company is that he will take a drop in the stocks in the immediate future but could possibly rebuild the companies to be stronger.  If the subscribers choose to stick with the old Netflix company, they have the benefit of the same cost but will only have streaming and no DVDs.  If they choose to subscribe to both companies, they will have a higher cost to pay but will also enjoy both streaming and DVDs.  There is no dominant strategy in this game, but depending on what the subscribers are willing to pay for their services, Hastings will have to pay attention.

http://www.wired.com/epicenter/2011/09/netflix-quickster-separate/

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