Netflix has recently announced that instead of offering bundles on its services (Which are: 1.DVD rentals by mail & 2.Streaming Content through computers, Xbox or other digital devices) that each service would have to be purchased and paid for separately, and that the equivalent cost of the new packages would cost as much as 60%. For example, a very popular package (in fact the one I use) allows for one DVD rental at a time, and streaming content on your device of choice. (I use my Xbox 360, iPad and iPhone to watch Netflix content) currently that price is $9.99, the new equivalent cost will be $15.99 per month.

There are a lot of different things going on here and it will help to break it all down piece by piece:

Netflix really does have 2 completely different businesses

The current DVD model is still awesome. In fact, I don’t see change in prices hurting them at all. Why? Because $7.99 for as many single DVD rentals you can watch is still a smoking great deal. Last time I checked, its more expensive to watch a single movie in the theater. I watch at least 7-8 Netflix DVDs a month, which works out to about $1 each. Plus, I don’t have to go anywhere to return it. As far as I know, just about every single movie ever is available on DVD through Netflix. Even the really obscure ones. I like making a list of about 30 and forgetting about it to only have them show up in the mail. I have not been disappointed with this service and will still use it. Netflix will survive here no problemo.

Netflix’s current contracts to stream content are expiring and the content owners want to CASH in

When Netflix was just getting started in the streaming video business, they were able to get great licensing deals on the rights to use content for streaming video. Now that Netflix has essentially killed off Blockbuster, Hollywood Video, as well as most other physical store rental places, those content owners want to CASH in (obviously). If my numbers are correct, Netflix is expect to pay about 11 times what it did for just the Starrz titles a few years ago (~$32 Million vs $350 million).

Have you ever looked for a video on streaming content and not been able to find it? Thats because content is owned by many different entities, and if there is no contract, Netflix cannot stream the video.

It also means that the content owners (not Netflix) will be in control of the cost to the customers. Unless Netflix has very deep pockets, probability says that it will be very difficult (impossible) for them to sustain the current streaming content model indefinitely. Even if they are able to successfully negotiate new licensing rights (price increase indicates this is their plan) they will be forced renegotiate again in a few more years. If they are still turning a big profit, content owners will want even more.

This problem is compounded by the fact that new competitors with much deeper pockets have emerged, Amazon for example has also just started a streaming video service, Google is in the works to provide streaming video through Youtube at a pay per view model ($5 per movie, which is both attractive to content owners, and sustainable. More popular movies are watched more often and pay out more.)

The current Netflix situation is also a wonderful study of Porters 5 Forces:

1. Competitive Rivalry within an Industry (while there aren’t too many major players right now, there is Red Box, Hulu and a few others, but things are about to change)
2. Threat of Substitute Products (DVDs, Netflix has a good foothold on this, as far as DVDs go they are safe- for now)
3. Threat of New Entrants (Netflix should be worried here when it comes to streaming content)
4. Bargaining Power of Customers (Netflix has really upset a lot of people- they are going to lose some customers, but I would predict not more than 10-15%)
5. Bargaining Power of Suppliers (In this case Content Owners- they have all the power, this is really bad as far as a business model goes)

In my opinion, this is what Netflix should do::

1. Apologize to their customers for peeing on them and telling them it is raining. Netflix should have just been more candid and told their side of the story. Of course they have to raise their fees, most reasonable people would understand that if they are paying 11 times more than they have for licensing rights. What Netflix did that was stupid here was to try to “spin” it as “added value”. Their customers are not idiots and this is what probably upset so many people more than anything. Netflix was only trying to cover their costs, they just came across greedy.

2. I would immediately start planning several different licensing plans that were based on pay-per-view rights for streaming content. This will simplify everything for everyone. Those who want to watch more, pay more, those who want to watch less pay less. Users buy bulk increments “Netflix Bucks” in advance (which would allow for Netflix to gain interest on these pre-paid fees), and users are charged per view, a certain percentage of it going to content owners. As a customer, I wouldnt like this as much, but at least I would have access to all titles and only be charged as much as I used it. Fair enough. If Netflix can get the price down to a dollar a pop- I think they would have a home run winner.

Netflix DVD service will survive. Blockbuster tried to copy them and from what I have heard it was an awful experience.

The streaming video part of their business is in trouble. Maybe not right away, but give them another few years. I hope they can work it out, I love the current set up for streaming content, even if they don’t have everything I want. Its a great service, and I am sticking with them because I think it is well worth it. I think the “bulk subscription” model for all titles are going to be just about impossible for anyone to sustain indefinitely.