News: Big Ideas

Netflix Got it Right and Wrong

I’M JUST SAYING. . .

Netflix Got It Right and Wrong

By Colton Perry

Netflix has had a rough year. While saying it’s “finished” might be an overstatement, it certainly isn’t going to be the dominant player it has been in past years. The disruptive company that changed the DVD rental business, the company that buried Blockbuster and countless smaller video rental chains and stores has found itself suddenly in a very vulnerable position. This is for a number of reasons not all of which are obvious, but collectively paint a clear picture of the difficulties that lie ahead.

Netflix created a public relations nightmare when it split its subscription plans. Customers were forced to either pay double the fees for the same plan they have or choose between the original DVD or streaming video on demand service. Make no mistake about it, Netflix CEO Reed Hastings would be the happiest man alive if he never had to mail another DVD to a customer. Clearly the cost of maintaining a network of distribution centers and all the overhead that is associated with that is far less attractive than streaming video on demand to connected consumer electronic devices.

Doubling subscription fees, especially in a weakened economy, resulted in consumer outrage. Netflix had a window of opportunity to try and smooth things over. Reed Hastings issued a public apology to all Netflix customers attempting to explain what they were doing. He announced the splitting of the company in two and rebranding of the DVD service to Quickster. It became very clear, Netflix is planning to get out of the DVD business and likely looking to sell Quickster.

Doesn’t produce content
This was the most obvious and public issue tarnishing Netflix. However, they have a number of other problems primarily related to content. Though they have dabbled in it, Netflix doesn’t produce any content, they are an aggregator of other producer’s content. They pay studios and other producers for the rights to stream films and shows to subscribers. Before streaming video over the internet became more main stream, Netflix had negotiated some very favorable deals for these rights.

In 2010, Netflix paid a total of $180 million to studios and producers such as Warner Brothers, MTV, and others to stream content. In February of 2012, the first of these deals with Starz, which includes some of the most premium content available to Netflix subscribers from studios such as Sony and Disney, will expire and Starz has indicated that is has no intention of renewing despite an increased offer of $300 million. Even if Starz comes back to the table or other producers renew or offer new contracts, it is clear that any future deals will come at a premium price. In fact, it is estimated that licensing content in 2012 will cost Netflix nearly $2 billion seriously jeopardizing its low cost subscription model.

Finally, let’s talk about competition. Once upon a time, Netflix was an innovative company and its red envelopes were a unique method of delivering video content to consumers. Now Netflix is shifting its focus to streaming video and it has competition ranging from Walmart with its acquisition of Vudu to Amazon’s Video on Demand Service (free to Amazon Prime customers) to Hulu Plus to Comcast’s Xfinity to HBO Go. And this leads not only to competition for consumers, but also competition for content. Netflix is no longer the only show in town, studios have other players vying for their content. In an example of things to come, HBO’s Go service is now available directly to consumers that have HBO as a part of their cable subscription package. It is only a matter of time before HBO Go and streaming services from major cable companies like Comcast’s Xfinity will be available directly to consumers regardless of a cable subscription or location.

As a result, this longtime Netflix customer clicked “cancel” and ended his subscription after eight years. It’s been a great run Netflix, but I have choices and you are no longer a unique and novel service.
Colton Perry is the VP of Account Management and a Strategist at Empathy Lab. He works with a number of clients in the media & entertainment and ecommerce verticals including Liberty Global, UPC, Telenet, Rogers Communications, Cogeco Cable, PBS Kids Sprout, Sony Pictures Home Entertainment, and the American Red Cross. You can reach Colton via email at cperry@empathylab.com or follow him on Twitter at @coltonperry.