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, 13 Jul 2011 @ 1:24pm

    Re: Re: Re: Re:

    You said: "if you really believe sticking the head in the sand approach helps, then by all means feel free".

    Me: 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.

    Fact is, while the distribution of digital content is near infinite (but not exactly, someone pays for the bandwidth and computers to do it), the creation of said content is not at all infinite, and rather is extremely limited. In plain and simple economic terms, the scarce resource is incredibly valuable, no matter what the price of actual distribution. The point that determines it's price isn't only on the distribution, but on the actual creation. Near infinite distribution of nothing would be meaningless, and to discuss it is pretty much a red herring.

    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. It isn't a tolerable business environment. Building business models based on it may be a functional short term way to keep from sinking your business, but this level of laying down with the dogs doesn't do anyone good over time... except perhaps the dogs.

    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. 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.

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