Netflix: Cannibalising the Business That Was Working

By the late 2000s Netflix had won the home-video war: its DVD-by-mail subscription had helped bankrupt Blockbuster, and the red envelopes were a profitable, growing business. But broadband was spreading fast, and management believed physical media was a dying format. The threat was not a competitor but the technology itself — the very business that generated Netflix's cash flow was, on a ten-year view, obsolete.

Netflix could milk the profitable DVD business for as long as it lasted and defend it — safe in the short run, fatal in the long run. It could add streaming quietly as a bonus feature and avoid disrupting its own economics. Or it could aggressively push subscribers toward streaming even though the catalogue was thin and the licensing costs high — cannibalising its own margins to own the future format before Amazon, Hulu, or the studios did.

Netflix chose self-disruption. It bundled streaming with DVD plans, invested heavily in licensing, and steered the brand toward on-demand video. In 2011 it overreached: it tried to split streaming and DVD into two services — the DVD arm rebranded 'Qwikster' — and raised prices about 60%. Customers revolted and the stock collapsed. Reed Hastings publicly apologised, killed Qwikster, but held firm on the strategic direction toward streaming. Netflix then began commissioning original content (House of Cards, 2013) to escape dependence on studio licences.

Streaming became the dominant way the world watches television, and Netflix — having moved first and then moved into original production — led it, growing to hundreds of millions of subscribers globally. The DVD business it deliberately let decline finally closed in 2023. The Qwikster episode is remembered as a costly tactical blunder, but the underlying strategy — attack your own profitable business before technology does — is now a textbook example of successful self-cannibalisation.

1. If a new technology will kill your business, cannibalise it yourself while you still have the cash and brand to fund the transition. 2. Strategy and tactics are separable: the direction (go to streaming) was right even though the execution (Qwikster, the price hike) was badly bungled — reverse the tactic, keep the strategy. 3. Owning the format is not enough; Netflix moved into originals to avoid being a mere reseller of others' content that could be pulled at renewal.