Netflix or Noflix?

Netflix Customers Subscribe to Unlimited Screaming – Tom Loftus, Wall Street Journal

Tons of people, irate over the fact that Netflix will be going up 60% on its pricing scheme, starting now for new members and September 1 for existing members. And of course, why shouldn’t they be irate? With the economy backsliding and Congress unable to pass an extension on the debt ceiling, the last thing a thriving company should look to do is increase a service SIXTY PERCENT.

And yet, it seems like Netflix has found itself in a Kobyashi Maru scenario in a B2C online service industry.

One of the problems consumers have often complained about Netflix is its ability to offer current movies in streaming format. The studios have reserved current movies for the DVD market at the same time as consumers have increased their streaming demand. This leaves Netflix in an awkward position: how does it maintain consumer demand for its streaming services/rights while giving the studios what they want from DVD services/rights? I don’t believe the studios are in denial about the collapse of DVD sales; what I do believe is that the studios want more money to stream new releases.

The problem for Netflix then, is largely that the studios aren’t pulling in what they used to make from consumers from the old model of video (and then DVD) distribution. For Netflix, this has meant that the studios have withheld streaming new releases in favor of physical distribution. Instead, consumers have moved toward digital streaming and reducing demand for DVDs. As the DVD option becomes less available, renting them will cost more.

The perfect economic substitute is streaming video. But in the next round of studio negotiations, the studios know that if streaming is the way, they have to have higher returns. With the studios leveraging their upperhand in content, this would mean that Netflix would have to increase the price of streaming.

So… Netflix is not going to have an option – they’re going to have to raise the prices of both streaming AND DVD; the studios will effectively have a stranglehold on the Netflix model. This is unfortunate, since consumers have seemed to be satisfied by-and-large with the service itself. But there’s no way out for Netflix…

…Which is sad because the consumer wants video. In particular, with the current state of the economy, going to the movies is too expensive in light of improved “home theatre” technology. But the studios are finding they need to recoup the revenues (and hedge fund investments) off their multimillion dollar movies, typically at a loss. I’m not sure there’s a good way out for any party. It’s almost like everyone is a bookie and all the bookies looking to break the other bookies’ kneecaps. Sadly, in the end, it’s the consumers who are getting it in the kneecaps instead.