Netflix: a proven come-from-ahead strategy

Now that it seemingly has the DVD-by-mail and download markets locked up, Netflix has decided to gouge its customers for every penny that they’re worth. When the news hit, I tweeted

@openITstrat
Joel West
Aren't monopolies grand? Netflix jacks up prices. http://lat.ms/n8NkcJ Suggests they no longer worry about competitors.
12 Jul via Tweetie for Mac

A lot has been written about this decision. For example, the Merc wrote Thursday:

After the Los Gatos-based DVD and streaming video company announced Tuesday that it was raising rates as much as 60 percent, tens of thousands of disgruntled subscribers flooded social networking sites with complaints and threats.

"Sorry Netflix, but you're losing another customer of many years," read one of the more civil posts.

Because of a growing chorus of sentiments like that, the price hike is beginning to look like the company's first major misstep -- and one that could damage its business as consumers consider alternatives.

Indeed, the official Netflix blog entry announcing the decision attracted a flurry of comments — until the 5000 comment limit was reached.

While the AP speculated that the price increase was to get consumers to drop physical DVDs and go with streaming-only plans, this seems at best a contributing factor, for two reasons.

First — as the Netflix customers complained — everything is available on DVD but Netflix offers a much smaller range of content via streaming. Thus, a streaming-only account gets a much smaller library and the streaming — while convenient — is not yet a complete substitute.

Secondly, while Netflix has the DVD model wired, the streaming model has less barriers to entry and imitation. There are scale economies for digital download but not the network effects of physical DVDs. Netflix also has two established competitors — Amazon and Apple — who may not have the market share for movie downloads but certainly have the technology. By dropping a bundling discount for the combined DVD-download business, Netflix is shifting its download business into more direct (and less differentiated) competition with A&A.

Since Netflix has not backed down, I must conclude there’s something more than sheer greed at stake. One possibility is that Netflix is passing along a price increase from its main suppliers — Hollywood — who are facing declining DVD sales after relying on these for year to support the bottom line. Mike Masnick of Techdirt also wondered along these lines.

Still, it makes me glad I haven’t signed up with Netflix. With my relocation to a new city and a new job, I was about ready to sign up for a streaming-only service. Now I’m going to sit back and see what competitors emerge and how they try to exploit the opportunity that Netflix has handed them.