Netflix pushes everyone On-Demand
Netflix announced yesterday, a 60% increase to their current $9.99 per month subscription. While users seem to be freaking out (search for Netflix on Twitter), its important to step back and look at their long-term strategy. Under the previous plan you were allowed unlimited streaming of content (that includes viewing through your phone, computer, video game system Apple TV, Tivo, etc.), and unlimited DVD rental. That was an insane deal at $10 a month. With the new plan Netflix is charging for streaming (at $7.99/month) as an add-on to their required base DVD plan (at $7.99/month). Basically, Netflix is now charging for a previously free service, but with good reason.
This is an important time for Netflix. Their stock is trading at an all time high of $300/share. They have over 23 million subscribers and a 60% market share in the digital streaming and downloads market. The company has taken into account the potential loss of customers from the price increase and outweighed it with the increase in revenue. No matter the reasoning, this could be the start of a decline for Netflix. Even if successful, it is going to be a tough fight as the cost of programming is increasing, there is a consistent threat of competition, and their strong market share in streaming will only decrease.
In March, Netflix quietly made noise within the television industry when they announced they had beat out HBO for the rights to a political drama directed by David Fincher and starring Kevin Spacey. This was their first push into original content, and a knock against HBO who has refused Netflix the right to their programming. Netflix’s deal, however, guaranteed over $100 million to produce 26 episodes of the series. Although it forces people who’d like to watch the show to subscribe to Netflix (and I’m sure they’ll tease with an initial free episode), this endevor has cost Netflix $3.8million per hour of programming. With a number of other television channels refusing to strike deals with Netflix, or cutting back on current deals, Netflix will continue to have to shell out big dollars for programming.
HBO coincided their refusal to strike a deal with Netflix with the release of their HBO Go application. The app gives every HBO subscriber (over 28 million) the ability to stream HBO’s entire content library, including all past episodes of the original programming. Users can stream on smartphones, iPads, and computers. HBO had been facing their lowest subscription rate in four years, but with the recent success of new programming and over 3 million downloads of their HBO Go application, HBO has taken a step in the right direction. Cable companies have needed to adapt quickly to new devices user’s are watching content on, and the users desire to receive content when they want it - on demand.
The competition for Netflix is not only from HBO. Starz recently announced a 90-day waiting period of Netflix to show their content, and NBC is no longer allowing any content on Netflix to be less than one year old. Other networks have taken notice of the dominance Netflix has gained, and are starting to chip away at their market share. Apple, Amazon, and Google eventually, are also part of the growing pool of competition for Netflix.
It seems odd that Netflix would not coincide their new price structure with a major release that gave customers proof of why these changes were necessary. However, it is very clear why they are doing this. The competition is getting fierce, and Netflix wants to prove they are not just another Blockbuster. They have adapted to market trends and want to become a major media company. With the increases in revenue from subscriptions, Netflix will look to produce substantial original programming and strike deals with any of the television companies that are willing to listen. For the affect this will have on users, please check for part two next week on maxjc.com.