Is Netflix Penny-wise or Pound Crazy?

Last week Netflix notified me that my current service (one DVD and unlimited streaming) would go from about $10 to $16 (8 bucks for streaming and 8 bucks for DVD’s).  That’s a 60% percent increase with absolutely no added value for the money.  At first, I found this shocking and was outraged at having to buy Netflix a large latte (and a low fat muffin) every month for nothing in return. Then I remembered that I am a Competer and that our data would probably show why they made this move.  Looking at Netflix traffic and visits trends, combined with the costs of running two different businesses (streaming and disc delivery) provides the right context for such a big move.

First, and not surprisingly, Netflix online traffic has gone up by more than 50% since 2009, which means they’ve won the war against Blockbuster and the Netflix user base is growing at a healthy rate.  Couple this growth with the growth in visits per user and we can see that not only are people signing up for Netflix, but they are actually streaming movies (as opposed to the gym membership model, where millions of people sign up in January but there always seem to be enough ellipticals to go around by March).

So what does this mean for Netfilx?  Well, exactly what they are saying in their public statements.  They need to focus more on their streaming business, and let go of their DVD business. According to Main St., it costs $0.75 to deliver a movie via disc and $.05-$.10 to deliver via stream.  By splitting the costs for DVD and streaming, they are asking the DVD users to prove to them that the DVD delivery business should stay alive.  Netflix is one of the internet leaders in showing that media costs become much cheaper when you bring them online, which means the rest of the industry and many other industries will probably follow their lead in one way or another.

Although Compete blog posts are prime real estate these days, I’d like to follow up in a few months to track how Netflix faired as a result of this decision and how competitors (Amazon Prime, FaceBook videos) responded.  The world of online content delivery is anything but boring.

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  1. Lindsey Mark

    The outrage seems to have stemmed from not only the price increase but also the availability. The price hike in combination with the lack of competition for DVD delivery in the market leaves customers feeling squeezed.

    I’d like to see how Redbox fits into this as they seem to be more kiosk & location based rather than streaming delivery. If you look at redbox.com’s daily information they spike in conjunction with the July 8th price hike announcement for Netflix. I wonder if they have plans for how to capture more attention given the market fluctuation.

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  2. Katie Wilson

    Interesting news: I just heard that Starz is cancelling their relationship with Netflix and in February a lot of their movies will be off Netflix. It’ll be fascinating to see what comes of that.

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