Thinking about Netflix

There has been a lot of complaint on the internet about Netflix announcing a price increase. People are acting like they did not see this coming. I am not sure how anyone who has been paying attention could not see this coming. There have been stories in the media on how studios want higher license fees from Netflix.

It was only a matter of time before Hollywood started demanding more money. In part Netflix causing content to have a reduced value in other markets.

From CNET:
Films offered on Netflix lose value rapidly. Some cable and traditional broadcasters won't go near a title once Netflix begins streaming it. Netflix takes the scarcity out of the equation, one film industry insider said. People can watch any of the service's commercial-free films and shows anytime they want.

The prevailing feeling among the studio managers I spoke with is that Netflix's streaming service will be a good outlet for the least-valuable material. If they have their way, Netflix will be the Internet equivalent of a swap meet, where only the most dated and least popular titles are available. The studios are betting that eventually people will get bored with the service.
They think that Netflix is hurting the value of their content:

One studio executive who must be casting a wary eye on Netflix’s latest success is Time Warner Inc. Chairman Jeff Bewkes, who has been quite vocal in expressing concern about the harm Netflix could do to traditional content models for the studios.

Speaking at the UBS Media Conference in New York last month, he suggested that Netflix’s stream-only option could spell disaster for cable-based video-on-demand.

“I don’t think it makes sense, certainly for our TV networks, to license series programming which we are going to put on demand [to Netflix] -- we have been very clear about that,” he asserted. “Our programming series on TNT are going to be available in current episodes on demand for you for no extra charge because you’ve already got [that cable channel] in your home.”

Bewkes added that the syndication of TV programs to cable and broadcast stations — a major studio cash cow for decades — could be endangered, and that physical DVD sales, which have been declining in recent years, could fall further due to overexposure on a service like Netflix.

“The fact that [Netflix] isn’t really paying anything close to what the value of the programming is on the series side — and they are essentially devaluing the product by running it too much and killing or reducing later exhibitions, second and third-cycle syndication, further DVD sales — means that that’s unlikely to persist,” he said.

There is no way that content companies will let Netflix stream their best content without getting a lot more money for it. There is no way Netflix will be able to pay for that content without charging their customers more.

I had read plenty of people that says Netflix is trying to get rid of DVDs. They think that this move is to get push people away from DVDs. I know lots of people who want to go all streaming, but the content is not there. DVDs rental is a tricky business to be in. Because of the First Sale doctrine Netflix do not need to pay a license fee to rent DVDs. There is no First Sale doctrine when it comes to streaming video. Netflix has to come to a license agreement with every content company for every piece of content.

Netflix customers want Netflix to get ever piece of streaming content right away. As long as movie studios can make any money off video on demand and pay TV channels, the Netflix window will be behind those windows. Netflix will not be able to afford to pay the studios what cable companies can pay for content. Cable companies set the market for pay-per-view/on demand content. On top of that cable companies can use their on demand offering as a marketing tool for their general service and pay more of the money they charge to the movie studios.

DVDs will only be produced as long as retail customers are buying DVDs for their own collection. If the bottom falls finally falls out of the DVD market, Netflix will be in a bad place. In the DVD era Netflix is a place where you can find just about every movie ever made. When DVDs are no longer a commercial product, a company like Netflix will be radically changed. Right now I can get 99% of the movies ever made from Netflix on DVD. That goes away when DVDs go away.

Netflix knows that customers want an all they can stream model. On Line Rental services like Apple, Amazon, and Vudu have not take off. Mostly because people do not want to pay for everything they watch and the restrictions imposed by the studios about having to finish watching in 24 hours really turn customers off.

Customers want a subscriptions service where they can get any movie ever made. They want to be able to stream that movie for a low subscription fee. I cannot foresee one service ever having all the content in the want customers want. There will always be companies who think they can do better on their own.

I have read a lot of people talking about cancelling Netflix and using services like Hulu or Amazon. The first thing I want to remind everyone is that Hulu is trying to sell itself. There is no guarantee that the current owners Comcast-NBC, FOX, and Disney-ABC will keep providing content after they sell it.

I feel that Netflix changing their price structure is bad for the customer of all these services. The other services not have a signal that it is okay to increase prices. The content companies also can point to Netflix and refuse to license content to companies who have a price structure that they think is too low.

Further Reading: Fast Company, AZ Daily Sun,


Aoibheall said…
You didn't add in the pressure from ISPs, who feel that Netflix is taking unfair advantage of the Internet's current content neutrality and using more than its fair share of bandwidth.

Let's not forget that there's a tight relationship between ISPs, cable companies and studios, all of which are setting themselves up against Netflix to get a bigger piece of the consumer entertainment pie.
I have to take exception with a few things here.

First, Hulu today gave a guarantee that any buyer would have a 5 year license of the content.

But much more important is that your argument is completely sound, but not on point. You argue that Netflix had to piss off their customers to keep good content. Not true. They had to raise subscription prices to keep good content. Pissing off their customers was a bad move any way you look at it. I have no doubt that they made a conscious decision to do that, but there were other choices.

In general, you should never raise prices without giving your customers something new. Even the tiniest little feature will dispel a great deal of disappointment at the price increase.

And not that it's my job to think of features for Netflix to offer, but here's one:

If customers clamor for new content, give it to them. Why not allow customers to pay for rental and purchase of very fresh content at the exact same price as Vudu or Apple? Stream all you want for 8 bucks. Get DVDs for 8 bucks. Or rent a brand new movie for 4 bucks, or own it for 20 bucks. And with their amazing infrastructure, they could store your library of purchased content for you -- something Apple won't do (yet).

But that's just a side note. Really, I'm saying that while you're absolutely correct that Netflix had to make adjustments, I don't agree with you that they had to piss off customers in the process. They are now up against Comcast, Time Warner, and every other service provider, and frankly, churn is their worst enemy.

-Your old friend Richard Bullwinkle
Rich said…

Does that 5 year guarantee include new shows? I wonder since they do not currently get all the content from the networks.

The studios have been trying to pressure Netflix to include a buy DVD button, and Netflix has pushed back. I think Netflix might have some business insight here that I cannot see. I am not sure how the business of Amazon or Netflix hold up. I know that the studio guarantee demands make those businesses hard to make profitable.

You told me a long time ago, "If you are going to eat a Turd Sandwich, make sure you take big bites." I think they knew they were going to shock their customers, and doing it all at once is best.

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