We outsiders cannot know exactly what motivated Reed Hastings and the rest of Netflix management to split their business into a streaming service (Netflix) and a dvd service (Quikster).  Speculators have offered their rationales: the sale of its streaming business to Amazon (unlikely), economic pressure from the studios (quite possible), to simplify accounting of streaming vs. dvd activity (possible, but there are simpler ways to deal), and killing off their dvd business (unlikely, since it brings in the dough).

There's one more reason often cited, which interests me the most: how to deal with the inherent innovator's dilemma of running an established business that's on the verge of disruption by a new up-and-coming model.

For those not familiar with the Innovator's Dilemma, read the book (or its many permutations).  If you're short on time, check out this Wikipedia page.

The Netflix situation is a classic dilemma.  The DVD business is healthy, but the future is clearly in streaming.  They've made the right moves in developing a streaming business alongside their DVD business, so when the market hits a tipping point they'll be there to capitalize.

But there's a catch and it's well articulated in the book.  Business leaders can make prudent decisions, acting in the best interest of the shareholders and still succumb the dilemma and drive their business into the ground.  In fact, it is often the actions made on behalf of the shareholders, which leaders are obligated to do, that cause the demise of the business. 

The book offers a couple of ways the business can deal, such as self-disruption (which Apple has successfully done with the iPhone vs. iPod or what Netflix has attempted to do), but none of these moves are fool proof.

I saw at my time at Intuit intelligent and experienced business leaders make near-term tradeoffs in future technologies and products in order to achieve short-term gains from the cash cow.  Shareholders look for a return on their investment and they must oblige.  These are smart moves only until they are no longer smart.

Which brings me back to Netflix.  I believe it's the innovator's dilemma driving the split.  But unlike Apple and the iPhone, Netflix does not believe they can disrupt their business at the same time champion their business at the same time.  

Instead, they have taken the extraordinary action of operationally dividing the businesses into two in order to a) invest in the future and b) do what's best for the shareholders.  Two businesses, two CEOs, two different teams, two offices, two brands.  I believe there will be smart partnerships (in fact, i'm surprised they weren't announced), but that's all they will be--partnerships.  Quikster is free to optimize and innovate on its business model while Netflix is free to look toward the future unrestrained.

And to the interested and educated observer this is going to be fascinating to watch unfold in real time.  Once the customer outrage subsides, which I believe it will, we will see how this decision plays out. Reed will be evaluated as either a business hero or another victim of the innovator's dilemma.