Netflix is gouging their dvd-by-mail customers.
Or so say the company’s critics after Netflix announced pricing changes for their streaming and mail-based video services on Tuesday. Todd Spangler at Multichannel News has an overview of the announcement and publicly-stated rationale for the move, and Ryan Lawler at GigaOm has a good summary of the consumer reaction.
Why would Netflix would make this move and create the predictable amount of consumer outrage? Moreover, why would it announce that it’s separating the DVD-by-mail business into a separate organization under new leadership? According to Spangler, at least one analyst suggested that this move was driven by a desire by Netflix to “[kill] off the DVD business as fast as possible.” That seems to run counter to Netflix’s public statement that “DVDs by mail is a long-term business for us.”
The reality is that the world is changing for both Netflix and Hollywood. Netflix is facing new competition on the streaming front from Amazon, Hulu, Google and Apple (plus other smaller players) and is moving to secure rights for more recent content while expanding into international markets. Every streaming subscriber it adds gives it more leverage in content acquisition negotiations. Hollywood is trying to preserve its existing distribution channels, exert tight control over new ones to prevent cannibalization, and increase content licensing revenues. There’s little incentive to move forward aggressively as long as the legacy theatrical and packaged media businesses remain stable and the studios appear to be enjoying playing multiple content suitors off against each other. Maybe even gouging content suitors at times.
Yet, there are signs that these legacy businesses may be dying faster than Hollywood publicly admits and new studio-driven formats (such as Blu-Ray Disc or Ultraviolet download sales) are clearly not gaining sufficient traction to fill the gap. Netflix may have an opportunity to capitalize on this vulnerability.
Thus, Netflix, through its new pricing, encourages its customers to move entirely to streaming (which is more profitable and strategically valuable) or continue to use DVD-by-mail (with expanded profits that fund new streaming content acquisition). That seems bold, but pretty smart in the long run.
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