Netflix pissed everyone off a few weeks back when it announced that the price of “everything you want, all the time, as fast as we can mail it to you or force the pipes to carry it” was increasing by more than 50%. It’s a bold new future and I don’t know what the right price for “unlimited” should be. If the market is any indication, I should get unlimited web access and voice calls full of static for $65/month, but I should get unlimited streaming video of popular movies on a full-size monitor for a fifth of that, if not less.
While companies jack up prices all the time, I see no reason to doubt Reed Hastings’s tearful email from Monday morning that the cause of the price increase was the differing cost structures of DVDs and streaming. The short version: you can’t profit from access to streaming movies the way you can profit from renting physical DVDs.
Bill Gurley has more (pure speculation, but it makes sense given what we know about the market):
So here is what I think happened with Netflix’s recent price change (for the record, I have no inside data here, this is just an educated guess). Netflix has for the past several years been negotiating with Hollywood for the digital rights to stream movies and TV series as a single price subscription to users. Their first few deals were simply $X million dollars for one year of rights to stream this particular library of films. As the years passed, the deals became more elaborate, and the studios began to ask for a % of the revenues. This likely started with a “percentage-rake” type discussion, but then evolved into a simple $/user discussion (just like the cable business). Hollywood wanted a price/month/user.
This is the point where Netflix tried to argue that you should only count users that actually connect digitally and actually watch a film. While they originally offered digital streaming bundled with DVD rental, many of the rural customers likely never actually “connect” to the digital product. This argument may have worked for a while, but eventually Hollywood said, “No way. Here is how it is going to work. You will pay us a $/user/month for anyone that has the ‘right’ to connect to our content – regardless of whether they view it or not.” This was the term that changed Netflix pricing.
We don’t know whether or not that’s the actual case, as Bill says. But it sounds plausible, since (1) it means that licensing requirements by the movie industry drove a pricing decision and (2) it’s going to cripple the streaming media business. And totalitarian, crippling decisions are the only page in the MPAA/RIAA playbook, 1999 to 2011 Edition.
I’m a big home movie watcher and I still can’t get Netflix streaming to work. I tried earlier this month with Restrepo – hell of a documentary; I recommend reading it with Junger’s companion memoir War – and got a fatal browser crash when I tried to go fullscreen. And it’s not a case of network speed, either. My pipes were fat enough to acquire Restrepo through “means” in 17 minutes and watch it after cooking dinner. And I’m the target audience: young, willing to watch movies on my computer or XBox-linked TV, forming those brand loyalties that will carry me into my golden years.
This seems to be the trend with big media in this decade. The publishing industry’s insistence on setting minimum prices for Kindle books has driven me back to the public library. Why pay $15.99 for a Lee Child novel I might not like when I can borrow it for free and then dispose of it when I’m done? Bantam Press gets no money when I read a library copy, compared to the $3 to $5 they got when I bought a $9.99 copy under Amazon’s old pricing structure. But, again, that seems to be the Old Media Playbook: do something dumb, blunt and fast without considering its long-term revenue implications.
Netflix continues to fascinate me as a case study in creative destruction. I just didn’t think I’d see them be destroyed as quickly. One door closes, etc.
Update: Huh. Well, this might change my behavior, at least on the Kindle front.