Saturday, July 16, 2011

A few thoughts about Netflix

So, Netflix-- the DVD-in-your-mailbox service (OR the "stream-movies-and-TV-shows-online service) announced that they are raising their rates-- six whole dollars a month! Really, six dollars isn't really that much, but it does represent a 60% increase for the same level of service. Here are some thoughts about it:
  • First, they aren't so much "raising" their rates as they are exploding the current offering of plans, and replacing them entirely. A typical Netflix plan (the one WE have, for example) allowed one DVD at a time by mail, plus unlimited streaming content. No such plan is available any longer; now, if you want both, you sign up for two separate plans-- one DVD-by-mail, and one streaming.
  • These rate increases are realistic-- in fact, you could (and should) think of it as Netflix finally catching up to where they should have been on rates. While Netflix was started at the end of the last century(!), as recently as three years ago one could sign up for a $5/month plan for 2 DVDs by mail per month-- OR, an $8/month plan for unlimited DVDs per month. These prices did two things (one inadvertent, the other, um, advertent?): it caused the market to become complacent about very low prices for DVD rental, and it drove the existing competition out of business. (Blockbuster Video, the absolute dominant force in video rental through the 90s, is laughably irrelevant now.) Now Netflix is the victim of their own success, as customers are balking at prices that are, frankly, quite reasonable: if you had suggested in 1995 that someone could watch a nearly-endless amount of movies and archived TV episodes, in their own home, without having to even visit a brick-and-mortar store, for the price of three Blockbuster rentals per month, they would have said, "where do I sign up?" But now-- 15+ years and plenty of inflation later-- we expect to get all of that, for much less.
  • I'm no insider, but I suspect this is the real reason behind the rate increases: contract renewals and internet costs. First, contracts. There's a company called Liberty Starz (previously Starz Entertainment) that basically controls all of the market for movies when they are "broadcast" in any form. Netflix contracted with them in 2008, when streaming was still relegated to low-quality YouTube videos; it was difficult to predict then how soon high-quality streaming would be available, and impossible to foresee how easily one could get devices to watch streaming content on your TV. Starz probably undercharged them, figuring that streaming wouldn't catch on-- who wants to sit at their computer to watch a whole movie? That contract was set to expire sometime in 2011, from what I understand. Thus, one part of the rate increases are likely due to a contract renegotiation, or at least in anticipation of one: surely the Netflix execs are thinking, "it's been a good run, but Starz is going to ream us for streaming content the next time around."
  • Second, internet costs. Netflix single-handedly accounts for almost 25% of ALL internet content. This represents a huge and growing cost in server capacity and usage. I can't imagine that this is coming cheap, nor that their costs here are dropping. If anything, that kind of bandwidth is only increasing in cost, at the same time that usage is in an always-increasing pattern. Perhaps the change in plan structure is an effort both to better cover these growing costs, as well as to stem the increase of bandwidth demand a bit.

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