Netflix: Pure Greed or Pure Genius?
Last week, Netflix announced a new pricing structure that splits their main services into two separate offerings. The first is a DVD-only plan starting at $7.99/month and the second is a streaming-only plan for the same price. What this means to most of their customers is that in order to keep their current plan of unlimited streaming and having at least one DVD out at a time, they’ll endure a 60% price increase. With no additional benefits. No new or better method of streaming or new deals with movie houses to ensure the latest DVDs. Nothing. Just a big ol’ price jump.
The Netflix Blog comment section immediately exploded with customers leaving less than thankful remarks. Netflix users started sharing their plans for ditching their subscriptions and using other services. Popular tech blog TechCrunch published a blog titled ‘Dear Netflix, Thanks For The Customers! Signed, Redbox’ echoing the sentiment of many subscribers to simply get their DVDs from the kiosk-based Redbox Company. You almost hear the anger in customers’ posts and the underlying hope of “Any second now, they’ll come back, apologize and reverse the plans. Or maybe they’ll continue with the price hike but grandfather in all of us existing subscribers.” As of right now though, Netflix is holding strong to their announcement. No sign of turning back has been given.
Surely, a company like Netflix that’s gotten it this right all along couldn’t possibly think increasing prices while adding no value for their customers was a good idea! What could they be thinking? Had the success gone to their collective heads and arrogance led to greed? Or, are they making a potentially brilliant business decision that involves extreme risk but will pay off ten-fold in the long run if it works? Is it pure greed or pure genius? Here’s the case for each:
This one’s easy. Netflix knows they’ve got you. I personally use their service and have been happy with both the DVD/Blu-ray portion and the streaming service. Netflix knows they have a great product with their streaming that many users have dumped their Cable providers for altogether. They also know, now that Blockbuster stores are dropping like flies, customers don’t have a strong option for DVD rentals. Even Redbox is still relatively small and, unless they happened to have seen one of their kiosks in a store they frequent, most people still don’t know about them (although, that may be changing now). Netflix can raise the price and rely on people to stay with them because they don’t know the lack of other options their customers have. Netflix even made it easy by saying the changes will automatically go into effect for current subscribers without them having to do anything. You mean I don’t have to put in any effort for you to more than double my bill? Thanks Netflix!
Netflix is relying on the laziness of its subscribers. They’re trusting that their customers are too lazy to find other options and too lazy to bother logging into their account to change their plan. By making the default “do nothing and your price goes up”, they’re ensuring that a large portion of their user base will take the price increase without even noticing it. And really, relying on the laziness of consumers is typically a good strategy.
Unless that’s not really their goal at all …
One of the main hurdles Netflix has been trying to jump for years is convincing major movie studios to release their movies to Netflix’s streaming service. Netflix doesn’t get nearly all the new movie releases and even when they do, it’s 28 days after the movie has come out on DVD. Now that Netflix has mostly removed businesses like Blockbuster from being a major threat, there isn’t much competition in the DVD rental space. I believe Netflix is hoping their subscribers cancel the DVD portion of their plan and migrate to a streaming only option. If Netflix can essentially kill the DVD market altogether and get everyone streaming their movies then they’ll have the capital and market leverage needed to force the movie studios into content distribution deals. If nobody is renting hard copy DVDs any more, movie studios will be forced to find a streaming distribution method to keep their products in front of consumers and keep the money rolling in. And right now, Netflix is about the only game in town for movie streaming. If they can capture that entire market by forcing their customers to stream all their video content it would be huge.
It’s also important that Netflix make this move now. Blockbuster stores are closing by the dozens every week but Blockbuster Online is still trying to ramp up. Likewise, Redbox is slowly but surely picking up steam. If Netflix waited another year or two to make this move, consumers would have at least two other options for both streaming and DVD movie rentals. Netflix had to make this move while there still aren’t other players on the field. In the meantime, Netflix gets to enjoy the extra cash they get from customers that forget to change their plan and stop setting up distribution warehouses and paying for shipping on all those DVDs to customers that do go through the process of changing their plans. The only way Netflix loses is if customers completely jump ship and give up both plans. But I doubt many people will go that route since there aren’t many other obvious alternatives. It’s likely that some will jump ship entirely and others will take the price increase by default and Netflix will be left with essentially the same cash flow.
If I had to predict, I think Netflix will suffer a short term public relations hit but endure through it to almost completely own the market a few years down the road. It’s a big risk, but that’s how companies make big bucks. What do you think? Am I giving them too much credit? Are they really just a bunch of money grubbing fat cats? Let me know in the comments.
Toby is Chief Solution Architect at Delphi Global Technology. He likes gadgets and gizmos aplenty and has whozits and whatzits galore. He also has two small children, so he’s able to quote Disney movies pretty well. To contact Toby directly, send an email to email@example.com.