Article: Dear Netflix…

by on July 14, 2011

Yesterday, Netflix began sending out an email to customers informing them that their plans would be changing their pricing structure from either $7.99 for streaming only or $9.99 for streaming and one-DVD-at-a-time to $7.99 for each part of the plan (so $7.99 streaming only, $7.99 one-DVD-at-a-time only, or $15.98 for both). Needless to say, the changes, due in September enraged just about everyone with a Netflix account.

The Netflix Blog explained this more in-depth:

Last November when we launched our $7.99 unlimited streaming plan, DVDs by mail was treated as a $2 add on to our unlimited streaming plan. At the time, we didn’t anticipate offering DVD only plans. Since then we have realized that there is still a very large continuing demand for DVDs both from our existing members as well as non-members. Given the long life we think DVDs by mail will have, treating DVDs as a $2 add on to our unlimited streaming plan neither makes great financial sense nor satisfies people who just want DVDs. Creating an unlimited DVDs by mail plan (no streaming) at our lowest price ever, $7.99, does make sense and will ensure a long life for our DVDs by mail offering. Reflecting our confidence that DVDs by mail is a long-term business for us, we are also establishing a separate and distinct management team solely focused on DVDs by mail, led by Andy Rendich, our Chief Service and Operations Officer and an 11 year veteran of Netflix.

There are a few ways to look at this, despite the anger all across Facebook and Twitter:

Either way, the reason is probably a by-product of increasing costs for streaming media. Unfortunately, the real issue is the way Netflix did this, much like Apple’s problems with Final Cut Pro X. It was blunt, came across as a ridiculously huge price hike (it is), and offered no alternative for those going from a $10/month-plan to a $16/month plan.

Shot In the Foot?

It seems that many think Netflix shot itself in the foot with these changes, mostly due to the complaints of an imbalance between its two “products” and making many choose. Streaming doesn’t exactly get the latest movies, nor is its catalog as big as the DVD catalog. It is great for TV shows or older movies and instant gratification. DVDs can offer anything that’s out there, but you’re limited by the number than can go out in the mail in a month. At $8-$10/month, Netflix was a very cheap alternative to pay-per-view, video stores, and even Apple’s own rental options. Now, at $16/month (or $72 more a year), the DVD and streaming plan together is becoming another “service”, like Internet, cable, phone, etc. That’s a big shift in mindset.

Apple’s Play?

The Apple TV and Netflix was (and still is) a winning combination, because it gave you the option of iTunes rentals, YouTube, AirPlay, and Netflix content all in one place. If many are going to leave Netflix, should Apple start offering other services on the Apple TV such as Hulu Plus or Amazon Unbox? Obviously, Netflix does contradict Apple’s own model for renting movies, yet the two coexist on many devices.

Let’s Wait and See…

The point is, despite Netflix being 14-years-old, their distribution model has changed a lot. Sure, the changes were very disappointing and poorly executed, but I think it could be better in the long run. Many saw the prior $9.99/month service as a DVD service with the included benefit of streaming, rather than a streaming service with a $2/month DVD add-on. By Netflix splitting the plans, they can position both as equal options, and therefore would need to improve the selection of the streaming option. New options are being added regularly, such as Mad Men later this month and a $300 million/year (up from $25 million/year) deal with NBC Universal, so it may come down to more expensive and better deals.

If Netflix had split the plans now with, say, a $2/month increase, then another increase in another year or so, this may have achieved the same end result (although less revenue right away), without angering customers. Either way, this may have just helped competitors, or things will stay the same. Hey, who complained when Kabletown (aka your favorite TV provider) raised rates by $6/month for customers who wanted multiple packages?

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