Commentary
Will Consumers Continue Valuing Netflix, Or Will It Become More Like Cable?
- by Wayne Friedman , Staff Writer, July 13, 2011
Netflix will raise its DVD mailing and video streaming package 60% over last fall's $9.99 price, to $15.99. Netflix's streaming-only package remains at $7.99.
Already there is much negative reaction from the Netflix faithful. But brand love for the service, which started as a DVD rental-by-mail company, continues to go a long way. Apple gets much of the same kind of love for its products.
Positive sentiment for Netflix had reached high enough levels that a price rise was seemingly doable. And despite some immediate reaction, longterm consumers might believe Netflix"s value is still strong versus monthly cable service with premium movie channels.
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Now at 22.5 million subscribers, Netflix -- as most movie/TV content owners know -- has decent clout in the entertainment distribution marketplace. Netflix says it's raising its rates because of "underlying costs."
Still, Netflix looks to test the business and consumer markets. It put its foot in the water of original programming by spending a reported $100 million on the U.K.-based series "House of Cards" starring Kevin Spacey. It would seem that if Netflix moves further in this direction, we might get another price hike because of "underlying costs."
Netflix hasn't taken a major brand/marketing step in the wrong direction yet. But continued price increases could send it into the same camp as cable companies.
To many, Netflix is the anti-cable brand right now. Hulu and Hulu Plus are also anti-cable, to a lesser extent. (A decade or so ago, this label might have been put on DirecTV). The "cord-cutting" tag for Netflix goes a long way for consumers when considering the seemingly non-stop rate hikes bigtime cable operators have imposed over the past two and half decades.
Cable would also say its price moves are because of costs -- higher "programming costs." Right now, Netflix, which mostly has a library of not-so-recent movies, doesn't have that problem. Down the road, all this might change if it gets in the race for ever bigger programming deals.
Then Netflix looks to walk that tightrope with consumers where its brand perception may change.
Wayne Friedman is West Coast Editor of MediaPost. You can reach Wayne at wayne@mediapost.com.
Cable haters don't understand the economics of Basic Plus, arguably the best innovation in media economics during the last century. While "Basic" was designed to be the entry-level product that gave subscribers better reception of broadcast TV stations, Basic Plus gave subscribers access to a cornucopia of new video experiences for a flat monthly fee. It gave networks a palette of revenue streams -- a quarter for every subscriber, a share of local advertising sold by the local MSO, and the ability to sell national advertising. The flat fee for every subscriber gave the video provider baseline recurring revenue, and gave the networks wiggle room so they could continually improve their offerings.
Thanks to recurring revenue, ESPN went from monster truck pulls to NFL games. It gave CNN breathing room from being an eccentric idea from an even more eccentric entrepreneur, until the Gulf War happened and suddenly people realized the value of round-the-clock news coverage.
The same model is fueling Netflix' current growth. Even better, Netflix doesn't have to content with sports programing, the bete noire of cable costs. But Netflix' ability to pull in new programming was always going to be limited by its ability to provide recurring revenue to library owners. You can only split a single dollar in so many slices, after all, even with tens of millions of subscribers. Netflix has effectively magnified its ability to attract higher-quality content tenfold, which will lead to more exclusive distribution arrangements with higher-quality content than anyone else, who will be stuck competing on the basis of online PPV windows.