Even though one of the best lessons from Southwest Airlines (NYSE:LUV) founder Herb Kelleher is that the customer is not always right, the reality is that sometimes you still have to give them what they want. Stubbornly sticking with New Coke would have eventually done major harm to Coca-Cola (NYSE:KO), and Netflix (Nasdaq:NFLX) management seems anxious to ensure that Qwikster doesn't become their New Coke or their Waterloo.

So, for now at least, forget all about "creative destruction." Qwikster is dead. (For more see, Netflix And Creative Destruction.)

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Turning the Ship
Netflix customers do not necessarily agree on much - there are huge differences in usage patterns, interesting trends in viewing preferences, and all manner of price sensitivities. But on this occasion they seemed to come to a nearly-universal conclusion - they didn't like Qwikster and they had no particular interest in having to navigate two different websites to continue using what had been a simple and seamless product.

Netflix, then, had a choice. Be stubborn and stick with a model that did make (and still makes) quite a bit of long-term sense for them, or bow to the wishes of the customer and give them what they want. After all, if Netflix doesn't want to meet its customers' demands, rivals like Amazon (Nasdaq:AMZN), Apple (Nasdaq:AAPL), and DISH Network (Nasdaq:DISH) would be happy to give it a shot.

Now, then, things will go back more or less as they were before. The price hike that angered a lot of people and led to revisions in subscriber counts is going to stick, but the Qwikster model is dead for now. When it's all said and done, Netflix will still have the largest library and the largest subscriber base in this business.

Good For Business, Bad For a Deal?
One clear rationale for the Qwikster plan is the likely obsolescence of the DVD-by-mail concept. With bandwidth getting cheaper all the time, there just isn't as much need for physical content as before - and what needs there are can likely be served by the likes of Coinstar (Nasdaq:CSTR). Nobody knows when the DVD-by-mail business won't be economically viable, but it seems inevitable that the day will come, and the old plan would have the company ready for it.

There's a second angle that investors should consider too, though. Netflix probably realizes that it has to sell itself eventually. The company doesn't control the content (as Liberty Media's (Nasdaq:LSTZA) Starz was more than happy to remind them), nor do they control the distribution. That leaves them in a perilous middle ground and subject to fierce negotiating tactics from content owners and distribution owners like Comcast (Nasdaq:CMCSA) and Verizon (NYSE:VZ). (For related reading, see Biggest Merger And Acquisition Disasters.)

As it was, Amazon would have made a lot of sense as an acquirer. Amazon is building up a pretty attractive streaming business of its own, but it's still small and it lacks the traction, interfaces and subscription accounts of Netflix. What Amazon doesn't need, though, is the physical DVD distribution centers that Netflix has - centers that will establish the "physical presence" in states that allow them to collect sales tax. Qwikster, then, would have made it quite easy for Amazon to buy what it needs and avoid what it doesn't want.

That said, a company like Google (Nasdaq:GOOG) could still find a lot of value in Netflix. Moreover, the bigger Amazon gets, the more aggressive states are getting in trying to collect that tax. Eventually, it may be the case that Amazon has to concede this fight and those physical DVD distribution points won't be an issue anymore.

The Bottom Line
Netflix bears are going to use this reversal as proof that management doesn't really understand its customers and had to make a desperate and hasty rescission when the pitchforks and torches came over the horizon. That may be true, but the fact is that business is always a balancing act between what the customer wants and what is best for long-term profitability. To that end, Netflix had the right idea in trying to launch Qwikster, but they were likewise smart enough to realize they went too far too fast and risked giving a much-needed boost to its competitors.

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Tickers in this Article: NFLX, AAPL, AMZN, GOOG, DISH, CSTR, CMCSA

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