More On The Success Conundrum At Netflix
I wrote about the dilemma of being Netflix in an earlier post; this is a sequel.
This week Netflix's announcement of pricing changes has created a stir in the industry. Netflix issued a seemingly reasonable explanation for the increase. That is what PR is for.
However, one has to look at this move in the context of a simultaneously complicated playing field and dynamic industry environment within which Netflix is trying to both survive and shape the future. In that sense, this price increase should not come as a surprise to anyone, other than those who think that everything on the Internet should be either free or subsidized. At the end of the day, when most media (if not everything) moves to the Internet, expect more price parity between traditional pay TV services and emerging Internet video services than was typical before.
Netflix was a flush-with-cash, successful company based on its DVD business. Its explanation that this recent price increase is due to the high cost of mailing physical DVDs suggests that the DVD-by-mail model is broken. Since Netflix has done well with this model for more than a decade and a not insignificant number of DVD customers underutilize the service (myself included) -- i.e., go weeks if not months between swapping DVDs -- there is more to this picture than a cost-plus pricing scheme.
Netflix is clearly taking a portfolio approach to managing its business. The (mature) DVD-by-mail is the cash cow funding the (emerging) streaming business. It's not a stretch to see how a profitable, unique service (DVD-by-mail) with a limited future runway should be able to fund the nascent but promising streaming future of Netflix. Within this pricing change is a tacit testament that the DVD-by-mail service still holds value for subscribers, and that they will not abandon the service en masse. For one the streaming selection is dwarfed by what is available on DVD as well as the timing of available titles on DVD. Secondly, if these users were price-sensitive, they would have switched to services like RedBox when the appeared (only the most heaviest user of Netflix makes out better price-wise than (s)he would with renting kiosk DVDs). As I wrote in the earlier post, Netflix has no direct competitor for its DVD-by-mail service. Not so for its streaming service, where substitutes and direct competitors abound.
I surmise that Netflix has assessed that the DVD-by-mail users are its least-price sensitive users, and are therefore going to be subsidizing its streaming service. After all, increasing its streaming pricing is going to throw a big monkey wrench in its subscriber acquisition strategy as well as its competitive position in the streaming market.
What started out as basically a "free" service for its DVD-by-mail subscribers, is now being charged and in effect, DVD-by-mail subscribers are expected to pay the difference to keep this service. While this is strikes me as bait-and-switch, I also wonder why Netflix did not simply offer its DVD-by-mail subscribers the option to either sign up for a paid streaming service or discontinue it.
A few possible explanations: one, that the number of DVD-by-mail subscribers who may have opted out of streaming may not be insignificant. Two, the streaming subscribers count is really important to Netflix. Three, it is easier to hit subscribers with a price increase and have them take it than to give them an option to choose and risk them opting out.
The last of these sounds a lot like how price increases are implemented by existing pay TV subscribers, doesn't it?
It is obvious that Netflix's business model is going to be driven by content licensing costs. As content providers are waking up to the reality of the value of the content in online streaming, expect the early largesse enjoyed by Netflix and others such as Hulu to be over, and greater parity in the cost structures of video services (online streaming and traditional pay TV) vis-à-vis content licensing. Consequently, the pricing across different types of services will also start converging. Expect online video services trending upwards and traditional pay TV services downwards with market forces at work.
The halcyon days are coming to an end for everyone - traditional pay TV services, online streaming services and streaming video subscribers. Traditional pay TV has enjoyed pricing power for most of its existence; early online services caught incredible licensing deals that allowed them to ratchet growth rapidly with disruptive pricing, and consumers got a cord cutting option for the first time. Netflix's new pricing scheme is just one indicator of the level-setting underway. That Netflix has chosen to hit up its DVD subscribers first is a good calculated decision on their part, but the way it was done is also an indicator of the high-stakes game in online video where market dominance is still up for grabs by anyone.__________________________________________________________________________________________________
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