Netflix's decision yesterday to separate unlimited streaming and DVD-by-mail pricing means that a large majority of its nearly 23 million U.S. subscribers will be forced to choose from among four tough choices. As I described in my last post, Netflix subscribers to any of its DVD-by-mail plans now face the choice of either scaling back to DVDs-only, switching to streaming-only, absorbing a rate increase of somewhere between 33%-60%, depending on which plan they've had, or simply dropping Netflix altogether.
Following is an attempt to sort out how subscribers may think about their decision as well as my take on Netflix's viewpoint on each choice.
1. Downgrading to DVDs-only:
Subscriber viewpoint: This will be the preference of subscribers in one or more of the following buckets: they value a wide choice of content above everything, they won't miss the convenience of streaming (or either never tried it in the first place, so it's irrelevant, or may now choose other streaming options like Hulu Plus) and/or they don't want to pay the higher combined new fee. Netflix's DVD library dwarfs its streaming library so this option prioritizes choice over convenience. And since Netflix actually reduced the price of its DVD-only plans, this would save these subscribers a little money. For those that choose to use DVDs only it will be just like returning to the pre-streaming Netflix of old.
Netflix viewpoint: Other than dropping their service altogether, this is the choice Netflix hopes most subscribers avoid. DVD-only subscribers are the most expensive to serve given mailing and DVD inventory costs, so they drag down Netflix's margins. Further, because they're returning to the pre-streaming Netflix model, they undermine the company's positioning as an Internet delivery company, which would take some sheen off Netflix's high-flying stock. As Netflix conceded in its blog post, DVDs remain a key part of its value proposition (a point I made nearly a year ago), and so there's real risk that a meaningful number of subscribers will choose this option.
2. Downgrading to streaming-only
Subscriber viewpoint: This choice comes down to an assessment by each subscriber of how integral streaming has become in their lives and how easily they might fill the DVD void with alternatives like Redbox. If the subscriber perceives there always seems to be something worth watching on streaming, then cutting loose the DVD library will be no big deal. Netflix's streaming library has greatly expanded in the last 2 years, but it still lacks current season TV episodes that are available on Hulu and for rental on iTunes/Amazon/etc. Movie selection is also slim relative to DVD and the absence of Sony movies is noticeable. And if the Starz renewal isn't completed that would further diminish movie selection. Having a DVD or two lying around the house has been a nice insurance policy that would be lost with this option.
Netflix viewpoint: Netflix won't love if subscribers choose this option but it's better than if they chose DVDs-only or drop their service entirely. First, it would be a reduction in revenue per subscriber since streaming-only is less expensive than all current DVD plans (margins would be helped though by lower cost of streaming-only delivery). The bigger issue is that for the first time subscribers would be asked to value and pay for the Netflix streaming library on its own, not as a value-added bonus to their DVD subscription. That's a huge leap, and carries real risk that churn for these subs could soar if the value doesn't hold up well. Surprisingly, given Netflix's constant flow of new streaming content deals, it made no attempt to announce something new yesterday to bolster streaming's value.
3. Absorb the rate increase
Subscriber viewpoint: An out-of-left-field rate increase of between 33%-60%, accompanied by no new value, is tough to accept and won't win Netflix many new friends. However, there's a strong case to be made that many subscribers will still conclude Netflix is a good deal while others won't notice the bump on their credit card and/or won't bother to do something about it. Inertia is a powerful thing in subscription-based businesses.
Netflix viewpoint: Netflix may have simply made a calculated bet that despite howls of anger from the minority, per the above reasoning, the majority of subscribers will just go along with the new plan by choice or by default. Still, Netflix subscribers have a sense of community and the Internet's echo chamber will reinforce the perception of Netflix as a greedy bait-and-switcher. That could spur to action many who would have otherwise accepted the new reality which would be bad news for the company.
4. Dropping Netflix service altogether
Subscriber viewpoint: Sure it may only be $6 a month difference, but many subscribers are quite emotional about this pricing change and seem ready to punish Netflix by dropping their service. For some this is just venting, for others they'll carry through, though they may come back down the road. At a minimum other options like Hulu, Redbox, iTunes, Amazon, HBO, Vudu and even cable are getting a fresh look today from scorned Netflix subscribers.
Netflix viewpoint: This is the disaster scenario for Netflix and would represent a real decision-making misfire. Just imagine what happens to Netflix's stock if churn soars. Ouch.
Summing up, all of a sudden there are a lot of variables in play for Netflix's future. Netflix's management team has always been known as data-driven, with a thoughtful decision-making process. But the new pricing approach carries significant new risks which are hard to quantify. Netflix could take some short term hits and then sail on with an improved revenue outlook. Or its charmed run may come to a screeching halt.
VideoNuze is the authoritative online source for original analysis and news aggregation focused on the burgeoning online video industry. Founded in 2007 by Will Richmond, a 20-year veteran of the broadband, cable TV, content and technology industries, VideoNuze is read by executive-level decision-makers who need to get beyond the standard headlines and achieve a deep understanding of online video’s disruptive impact.