Killing The Golden Goose: Is Hollywood To Blame For Netflix's Poorly Thought Out Massive Price Hike?

from the what-blockbuster-and-walmart-couldn't-kill... dept

If you remember back a decade ago, Netflix was definitely the darling of the modern movie rental business, but there was concern everywhere that the "little startup" was about to get killed when bigger competitors entered the market. After all, Walmart itself created a near-identical copycat offering in 2002. In 2004, Amazon started kicking the tires on a Netflix-like offering as well (amusingly, Netflix broke the news of Amazon's impending arrival in the market, effectively deflating some of the hype for Amazon's own announcement). And, of course, all along there was Blockbuster. The king of movie rentals in the 90s was going to destroy Netflix with its own offering, leveraging its brick-and-mortar stores, according to the common wisdom.

Exactly none of that played out the way people expected. Netflix continued to grow, and successfully expanded into video streaming, rather than just DVD rentals, with a very convenient flat-rate program. Walmart gave up on its Netflix-like business in 2005, and actually handed over the keys to Netflix, to let it run Walmart's online movie rental business. Amazon realized it couldn't really compete with DVD rentals and never brought that business to the US. Blockbuster tried over and over again to compete, but never got much traction, went bankrupt, and eventually was bought by Dish Network earlier this year.

Meanwhile, Netflix has continued to thrive, and plenty of people have pointed to its online streaming, which represents a giant chunk of US internet traffic, as an example of how if you provide a convenient, user-friendly and well-priced offering, you can compete with unauthorized file sharing. With Netflix, the company seems to realize that it's that convenience and access that people are paying for, rather than the content itself.

But, of course, as with so many things involving technology and services that make content more valuable, the copyright holders get jealous and start complaining that they're not making enough. With Netflix's growing power, the studios have been on the warpath to cripple Netflix in protest of the current pricing scheme. In some ways, they really hate some of Netflix's early deals, which allowed the company to offer such a convenient and reasonably priced offering. Pretty much all of the later online streaming movie offerings are, instead, forced to play by the big studios' rules, which makes most of those services totally undesirable.

This has also resulted in some fights with studios directly, and some studios even pulling movies from Netflix.

Given all that, it's hardly a surprise that Netflix decided it needed to raise its prices around 60% for many users. AS you've probably heard, they've basically separated the physical DVD rentals and the online streaming, which used to be included with most accounts. Now you have to pay for each separately, so to get what people had before, their bills are going up quite a bit.

The result of this announcement has been all over the internet (including Netflix's blog and Facebook page), and it would be safe to say that everyone hates the new pricing with a passion. It's incredibly aggressive on the pricing front, but it's not difficult to see why Netflix did this. First, the competitive playing field looks a lot clearer today than it did a few years ago. When companies have no real competition, they jack up prices massively.

Second, however, I'd bet that Netflix is currently in a battle to control its destiny behind closed doors with Hollywood. The studios are demanding lots more cash than in the past, and Netflix seems to think that jacking up prices quite a lot is one way to get the necessary revenue. But Hollywood, of course, couldn't care much less if Netflix survives. They still think that their endorsed crappy online services, with their DRM and massive limitations, is legitimate competition.

So while some are blaming Netflix for the giant price hike, I think it makes more sense to look at the studios and their unwillingness to fully embrace Netflix, always worrying that it would "take away" from their existing business lines.

Filed Under: internet, movies, pricing
Companies: mpaa, netflix


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  1. icon
    Jay (profile), 13 Jul 2011 @ 2:13pm

    Re: Re: Re: Re: Re:

    "It has nothing to do with sticking ones head in the sand. Rather, it's understanding that the "market forces" in play here are not natural. "

    The market forces are that people can pay for access through Netflix, buy on iTunes, or find the same resources through Bittorrent, downloads, or a number of free resources. They are competing with free. Hulu has made money, Netflix did the same until the price hike and iTunes is still valuable money to those in the suits.

    " the creation of said content is not at all infinite, and rather is extremely limited"

    The burden of that cost is not felt by the consumer. They don't see it, therefore it's a fixed cost. They can choose to buy tangible goods and help a show they love to run longer or watch it in a variety of ways. That's entirely within the spear of influence of rights holders. However, rights holders no longer have power of distribution. They fight one free resource, two others pop up later on.

    "The point that determines it's price isn't only on the distribution, but on the actual creation."

    Uhm... No? Not unless you're openly admitting these companies are competing with a monopolistic competition mindset. The distribution costs can be covered in a variety of ways. The Big companies just haven't done them, instead opting for the same annoyances to customers that lead to piracy:

    Windowing
    Regionalization
    High prices for digital goods

    "Near infinite distribution of nothing would be meaningless, and to discuss it is pretty much a red herring."

    ... How so? It isn't a red herring, by any stretch of the imagination. Hell, it's a rather important issue. People want to find songs that they enjoy along with artists that they can listen to. If marketing has taught me anything, it's not the technical details of piracy that really matter.

    People want just a few things:

    Value
    Convenience

    If the product is more convenient with piracy, you're doing it wrong. If you're having a too high price, you're also doing it wrong. The expectations and profit margins are going to be different now that you have to compete with free.

    "The current level of piracy is about on par with having armed gang members in every store, 50% of the time taking the money from your sale or just giving your product away for fun"

    Piracy has nothing to do with drug sales. There's no force in setting up a link, or a bittorrent or a download. It happens. Because various options aren't available in other countries, downloads occur. If people could legally stream in other countries or what have you, piracy would decrease.

    " Building business models based on it may be a functional short term way to keep from sinking your business"

    Windsor Media has said similar things to what Mike says on a daily basis. He's not sinking with the dogs. They're thriving.

    "We aren't going forward as long as the virtual version of armed thugs can take your customers and give them the products for nothing."

    If they're offering a better product, then you need to improve. Walmart got to where it was by competing against Kmart and pushing smaller competitors to niche products. It happens.

    The reason that most gamers love OCRemix is because anyone can remix any music and it's a thriving community. It doesn't take away from music, it adds to it. There are no armed thugs anywhere. Merely people sharing content in various forms.

    "Since both sides are depending on the same thing for survival (fresh new in demand content), the murder of the golden goose will leave both without purpose."

    I would love it if Netflix actually put up stats on its old shows... Just to see if your "demand for new content" is the problem, or distribution issues (such as labels having the power to define winners or losers by how much they charge is actually the issue.

    Time savers

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