Netflix Splits Itself in Two: The Innovator's Dilemma, Live

From the archive: first published September 20, 2011, in the middle of the Qwikster saga.

Reed Hastings built his fortune on one sharp insight: people would pay a lot to escape video-store late fees. Ever since, the Netflix founder has run the company as a laboratory for clever ideas — the $1 million prize for a better recommendation algorithm, the famous "pro sports team" culture with unlimited vacation and a generous severance for the merely adequate.

That same appetite for shaking things up sat at the center of Netflix's troubles in 2011. In July, the company raised the price of its DVD-plus-streaming combo from $9.99 to $15.98 a month. Customers were furious, the stock tanked, and Netflix cut its subscriber forecast.

Then CEO Hastings did something extraordinary: he emailed an apology to subscribers — and made it worse. The remedy was to split Netflix into two companies. Streaming would stay "Netflix"; DVD-by-mail would become "Qwikster," a separate brand with a separate website, separate billing, and even separate queues. Customers who wanted both would have to manage two accounts, two subscriptions, two everything.

The strategy had a logic: streaming was the future and the DVD business, with its warehouses and postage, was a different company wearing the same shirt. Clayton Christensen's Innovator's Dilemma argues exactly this — that a company must be willing to disrupt itself before a competitor does.

But logic isn't experience. Subscribers didn't experience a bold strategic move; they experienced their one convenient service being torn in half, weeks after a price hike. The Qwikster split was reversed within weeks — one of the fastest strategic about-faces in tech history.

The episode remains the cleanest real-world illustration of the innovator's dilemma: Hastings was right about the future and wrong about the moment, and knowing the difference is the whole game.