Netflix Knows What They Are Doing

Taryn Fiol from Unplggd on Netflix’s price increase:

You almost get the feeling that Netflix knows they’re losing customers. Maybe that’s the point. They’re trying to phase out the comparatively-cost-careless service of shipping out DVDs in favor of cost-efficient online streaming.

I don’t know if I agree with any of this statement. I don’t think Netflix is really losing customers. I also am not convinced that the streaming service is that much cheaper in the long run for Netflix. Unless Netflix has some secret technology sauce there has to be a point of diminishing returns. Supposedly something like 30% of the bandwidth used during primetime is used by Netflix customers. If that’s the case, and I am sure it increases every month, they need to worry about the future.

By separating the plans, they force customers to make a decision, pick one plan or the other or pony up the cash. The downside to the streaming only plan is that you have to wait much longer for new releases, you have to have a way to watch it on your TV and you have to suffer a quality drop. The downside to the DVD plan is that you have to decide in advance what you want to watch and you can only watch things as frequently as new discs arrive. My guess is that 75% of their customers use streaming or physical discs and not both. If you had streaming-only before, the price stays the same. If you had a DVD+streaming plan, but really don’t use the streaming, the price drops.

I have heard loads of people talk about canceling their plans. I think this is a vocal minority and most people aren’t going anywhere. I think most will decide on one type of plan or the other, depending on which they use the most. I also suspect this vocal minority is mostly people use both types of plan and therefore are most affected by the cost.

Netflix’s biggest flaw, was not sweetening the pot at all. When you raise prices without offering something more, it pisses off consumers. The rumors indicate that their content deals are about to expire (or have) and they need to increase revenue to compensate for this. That makes plenty of sense of course. Content owners1 are finally coming around on Netflix being a real threat/alternative to traditional ways of consuming media and they will make sure they get a bigger piece. Consumers, of course, don’t care about this, but this seems like Supply and Demand 101. Price yourself to attract customers, when you get to #1, raise your price and make a big profit.

I suspect we will see a couple of things in the next 6 months:

  1. The prices will stay right where they are.
  2. Netflix’s customer base will not decrease significantly.
  3. Their financial results will only get better.
  4. There will be a change in consumers’ favor, most likely shorter time for new releases on streaming
  1. Movie studios, TV networks, etc. []