We are now down a rabbit hole within a rabbit hole. First, Netflix CEO Reed Hastings announced a sudden 60% price increase on a very popular service. After losing more customers than Netflix expected, Hastings
I’m not a Netflix customer, and never have been. In case you were wondering, their announcements look every bit as crazy to a neutral observer as they do to their 24 million customers – down about 1 million since rabbit hole #1, but still a huge number.
Nothing about these announcements makes sense, at least on the surface. Netflix originally charged $7.99 per month for the 1-DVD “by mail” service, $7.99 for video streaming, and $9.99 for “1-DVD plus streaming”. Then, in July 2011, weeks after a contract dispute with Starz, Netflix announced that the charge for 1-DVD plus streaming would increase to $15.98 per month.
The initial indictment includes the following counts:
(1) Raising prices too far, too fast. A 60% price increase is simply not an accepted business practice. It’s an outrage. If business conditions warranted an increase like that, Netfix should have spread the increase over multiple years.
(2) Not offering a quantity discount. Buying the 1-DVD and streaming services separately costs $15.98. By buying them together you now can save … let’s see, here … I’m not so fast with price comparisons … nothing?? What’s the sense in that? If $15.98 is the right price for the combined service, why didn’t they price the separate services at, say, $9.99 each? That would encourage customers of one service to add the other.
(3) Failing to acknowledge costs. Customers expect quantity discounts, but that’s not the only reason to offer them. A customer of the combined DVD-plus-streaming service surely costs Netflix less than a DVD-only customer, for the simple reason that when you’re watching a streamed movie, you’re not watching a DVD. It costs less for Netflix to stream a movie than to mail a DVD. Customers of the combined service almost certainly order fewer DVDs, which means Netflix saves on DVDs, shipping, handling, and so on. Other costs, such as managing web site registration, remain the same.
(4) Failing to encourage DVD customers to move to streaming. Netflix endlessly argues that the future is streaming, and no one disagrees with them. Then why not encourage DVD customers to try out the streaming service?
On to the rabbit hole within the rabbit hole. On September 18th, Netflix announced they would no longer allow you to buy “DVD plus streaming” as a single combined service. You will soon have to buy them from two separate web sites – Netflix, for streaming, and a new site, Qwikster, for the original DVD service.
This adds another charge to the indictment:
(5) Making it harder for customers to do business with you. Plenty of businesses are hard to do business with, and some of them succeed in spite of themselves. But can you think of a business that made it easy to do business with them, and then deliberately made it more difficult? With the change, to get both DVD and streaming you’ll have to make two separate payments, one to Netflix, and one to Qwikster, its subsidiary. If your credit card expires, or your address changes, you’ll have to change it in both places separately. Your movie ratings and preferences? Managed separately. Currently, you can immediately see if a movie is available in DVD, streaming, or both. When the split happens, you’ll have to check out both sites to answer that question.
Netflix argued that DVD and streaming business models were different, necessitating the split. That’s baloney. Customers want a seamless service. Give customers what they want, and sort out the business models behind the scenes. It’s as if United Airlines announced that they would no longer accept baggage, sending passengers to stand in yet another line to check their bags. Or here is perhaps a better analogy. It’s as if your bank split your checking account into two accounts at two different banks, one that handles only paper checks, and another that handles only online transactions.
What might be going on?
These nutty announcements reveal a disturbing reality: what’s good for customers is viewed by movie studios as a threat to their profits. Netflix customers made it clear they liked the combined “DVD plus streaming” service; it was easy to use, and reasonably priced. But the movie studios want a future where to get the content you want, you have to buy multiple independent services – Qwikster, Netflix, other streaming services such as Hulu, etc. Ideally, they want you to buy each movie three times: the movie theatre ticket, the DVD, and the streaming version. Netflix’ combined service threatened that future.
Here is what I think happened. Rapid growth in subscriptions for Netflix’ combined service threatened to trigger Starz contract provisions that would disadvantage Netflix – higher license fees, or perhaps additional data sharing. The contract between Starz and Netflix, however, defined a “combined service” as one which offers a package discount. Netflix weighed its options, and concluded it was better off eliminating the discount, and avoiding the trigger. This would explain why Netflix didn’t offer even a one penny discount ($15.97) for the combined service. By eliminating the discount, a customer of the combined service was, for contract purposes, a customer of two separate services. In effect, Netflix’ announcements amount to a window into its negotiations with content providers such as Starz.
The content providers learned their lesson; to make sure customers are forced to buy multiple services, they will insist on defining “combined service” much more carefully in future contracts. Faced with that negotiating position, Netflix decided to erase all semblance of a combined service.
Content providers got what they want: a future where customers have to buy multiple independent services. They were willing to engage in separate negotiations with Netflix and Qwikster because it supports their strategy in a way the combined service did not. Netflix customers were left to wander the twilight zone. What makes no sense to customers makes perfect sense when viewed through the lens of the movie studios.
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