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. identicon
    Anonymous Coward, 14 Jul 2011 @ 4:31pm

    Re: Re: Re: Re: Re: Re: Re: Re:

    To use your analogy of roads, let's look at it this way. Say your local township puts in a road and then implements all kinds of rules for using it; speed limits, lanes, signs, lights, etc; the parts you expect from any road really. Then, they decide to put a toll on that road. Now, some people will pay this toll, provided it makes their trip shorter/faster or exposes them to less traffic or any number of other reasons. Others, however, will choose other routes that don't have this toll, despite it taking longer to drive or having more stop lights or whatever other inconveniences it may have.

    Here, the toll road represents the legitimate sales avenues and the free road represents illegitimate avenues. As long as the convenience of the tolled road is not outweighed by the cost to use it, they will have people paying the tolls and using the road. Once that price gets too high, or the road becomes inconvenient, people will stop paying that toll and just use the free route.

    What most of the media industry has done is demand a lot of money to use their road while at the same time making it far less convenient than using the free road.

    We do see some great examples of companies that balance their price and convenience brilliantly though. Apple's iTunes and Netflix are 2 shining examples; they both charge money for the same things people *can* get for free, but the cost is low enough and the convenience is high enough that most people rather pay for the convenience of delivery than spend the time routing around the price.

    All this to say: if your business isn't accounting for the other forces on the market, natural or unnatural, legal or illegal, you can't expect success, and no amount of litigation is going to make you a success. A small number of people will always do everything they can to not pay and trying to get them to is a waste of time. But, there's still a HUGE market waiting to give you money for things they could otherwise get for free if you can just balance the cost and convenience properly.

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