60% for Nothing

july 12, 2011

Wow. Just: Wow.

Good job Netflix, whatever good will you earned from your loyal customers (I once was for almost a decade) has been lost. Gone. Say Good-Bye to it. Your announcement today of price hikes -- the second in less than a year -- really was...well, there is no easy way of putting this: Stupid.

But, before I get started, let me say that I do agree with Reed Hastings on one thing: Streaming is the future. I just don't think the time for streaming to be mainstream is now. Reed and company seem to be pushing Netflix streaming for the sake of pushing streaming. The time is not right, there are too many external factors that Netflix cannot control which are not ready. Broadband is one of them. Constrictive cable and telcom broadband policies are not at the point where streaming can be mainstream. Movie studios are the other problem, they are not ready to give up their content to Netflix right now without serious price hikes.

So, right now the streaming library at Netflix is not good enough to be a product by itself.

What happened today: Netflix announced that they would be separating DVD and streaming. This would cause people who have a $10 per month plan to have to start paying $16 per month -- for one DVD out at a time plus unlimited streaming. That's raising rates 60% without giving the consumer 60% extra benefits.

That is only one of the problems though -- had it been just a price hike, I'm sure there would be some people would would happily pay the extra money. The other problem was the wording of Netflix's announcement of the price hikes which treats their customers as idiots. They try to sell this price hike as a benefit to the customer, which is totally disingenuous.

What customers are left with is a lobotomized DVD selection (and even worse Blu-ray selection) because Netflix chose to let the physical media side of the house deteriorate in order to build up their streaming side of the house. The problem is that the streaming side of the house is not completely built yet.

My guess to what is going on here is that they are coming up on renegotiation of contracts with the studios -- who have come to the conclusion that Netflix is not their friend and that all-you-can-eat streaming is not the business they want to license their content for. With the renegotiation of contracts, Netflix will incur -- without a doubt -- more cost to gain licenses to movies. This move to completely separate physical media from streaming is a way for Netflix to get money to cover those costs -- ie. Netflix passing on the cost of their business to the consumers.

While streaming is the future and massively profitable -- at least for now for Netflix -- I have to question Netflix's business plan. For the cost of gaining the streaming rights to movies: what is that worth on the physical media side? How many new release films could Netflix get for the cost of a streaming license?

Do you think that Netflix is pushing a little too hard for streaming? Are they moving faster than they should? Will this hurt their business? Are you a Netflix customer and what will you do with your account based on the announcement today?