New Netflix Plans Open the Door for Apple, Others

| Editorial

With a miscalculated stroke of the pen, well, an untimely e-mail, Netflix has made its first major blunder in the online, streaming video wars. Netflix could end up losing money as well as help Apple cement its relationships with its movie watching customers.

Yesterday, Netflix mailed a notice to al lits customers. Here’s what mine looked like.

Netflix e-mail

Netflix message, 12 July 2011

In my case, the increase in cost, to keep the equivalent service after September 1, amounts to a massive 50 percent hike. (US$11.99 -> $17.98.) That’s really tough to swallow, and like many others, I strongly suspect, it will force Netflix customers to fundamentally question what kind of service they want to take forward.

That’s a monumental jolt, and one that Netflix seems not to have fully thought out. That is, when the price jolt is that extreme and forces customers to immediately question the value proposition, in light of other services they have, it’s a business blunder. It’s no longer a no brainer that we’ll continue our Netflix service, as is, forever. Netflix has forced our hand, and that’s unwise.

Unlike Apple, a coherent vision doesn’t seem to have been in place. For example, Netflix added no extra cost streaming at a time when they knew that Internet streaming would become very popular. Instead of introducing it as an extra cost item, Netflix tried to boil our frog, offered it for free, but now they have to face the music. Other similar companies bite the bullet and slowly raise prices, closely monitoring the customer attrition.

Here’s the thought process that I, most of the TMO staff, and I think many other people are going through. “I have several other sources for the latest movie releases, releases that Netflix doesn’t typically offer: Apple TV, satellite/cable VOD, and Red Box to name a few. I pay for these relatively recent releases, and the video quality is fairly good, almost DVD quality. Then when I want to watch a second tier movie for free, I go to Netflix. Why should I keep paying for the delivery of DVDs?”

In my case, that means that my monthly cost will drop from $11.99 to $7.99 month. Netflix will lose money with me and perhaps worse, submerge itself with all the other online sources I have, Roku, Apple TV, and DIRECTV VOD. No more red envelopes takes a away a big connection, a special relationship, a ritual with the customer. The obsession with managing our DVD queue was also a hallmark relationship with Netflix that will now disappear earlier than planned. It was already unwisely removed from the iPad.

Of course, there are some downsides. Apple TV doesn’t have a lot of the old, warm fuzzy, legacy movies that Netflix has available on DVD. On the other hand, if I really want one of those, I might be able to find it at Amazon or at Wal-Mart on DVD for US$5. So it may not be a big concern for some. Others in rural areas will, to be sure, maintain their mail service, but, I surmise, not enough to keep Netflix from losing money overall.

Apple has sold a boatload of second generation Apple TVs. Apple has a coherent vision of what to deliver and what to charge. I know that when my wife and I are looking for a great new movie to watch, like The Adjustment Bureau, we go first to Apple TV’s new releases. We don’t have to wait for mail delivery. If that doesn’t work, we scrounge around for freebies on Netflix, buried as it is under the Internet menu. The one movie we have in a red envelope under the TV may not be the one we want to watch at the moment. Netflix couldn’t have opened a bigger door for Apple.

Finally, if this was a plan by Netflix to make a lot more money, it isn’t going to work in this economic climate. People prioritize. If this was a plan by Netflix to accelerate the demise of its DVD-by-mail service, it’s going to work nicely, but also damage the customer relationship in several ways mentioned above. Perhaps Netflix thinks that it has the unquestioned loyalty of its customers who won’t opt for, mix and match, other competitive services. Perhaps they think that merging in, indistinguishable from other streaming services amongst our TV system components, will not be a problem.

Netflix could be very mistaken.

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Comments

mlvezie

The best of both worlds for me would be a limited DVD by mail service plus the streaming. I don’t watch that many that way anyway, so the random times I want to watch an old movie that’s not available streaming, I can rent it that way.

Netflix does offer a limited DVD by mail service, and it offers limited streaming. So here’s a solution: I create two NETFLIX accounts. One for the limited DVD by mail service (and limited streaming (does anyone know, is the iPad considered “Mac or PC”?)), and one for unlimited streaming. If I did that, I’d save a couple bucks a month.

John Dingler, artist

Hi John,
This sentence, “If this was a plan by Netflix to accelerate the demise of its DVD-by-mail service, it?s going to work nicely, but also damage the customer relationship in several ways mentioned above,” is in the conditional; It begins with an “If.” “Was” is not used with “if.” Rather, “were” is correct as in, “If this were a plan….” But other things too.

The sentence correctly written would look like this:

“If this were a plan by Netflix to accelerate the demise of its DVD-by-mail service, it?s going to work nicely, but (it would) also damage the customer relationship in several ways mentioned above.”

John Martellaro

John D.:  Subjunctive case, of course.  But I was writing in the past tense, as if the plan had been hatched in a previous time.  So I left it as is.

Nemo

Netflix’s problem is that it must bring its revenues in line with its cost structure.  Netflix has some very expensive deals with the media companies, and those companies keep jacking up the price on each negotiation, so Netflix probably had to raise its subscription rates, which started out too low, to compensate.  We’ve had the bait; now, Netflix must make the switch. 

The problem for Netflix, as John points out, supra, is that it engaged in low pricing that customers have come to expect and believe that they have a right to; customers couldn’t care less about Netflix’s negotiations with the media companies.  Apple was much smarter to start with a realistic cost structure based on the deals it could do and on the costs of running iTunes and then charge a price that reflected those costs.  While it costs Apple some customers in the short run, it now make them price competitive with Netflix’s streaming service, while Apple has the advantages of its Macs, iOS devices, and iTunes, which it can and is designing into a home entertainment system, something which Netflix can’t do. 

And Netflix’s DVD service almost certainly costs more than its streaming service, as the latter simply costs less, so Netflix discriminates against it, as it must, in pricing.  Also, physical media is, I think, going away for several reasons.  For distributors, like Netflix, it costs more to handle physical media, and physical media involves the delay of delivery.  And for the media companies, physical media is not only more expensive, it exposes their films to copying, while streaming provides a stronger, if not perfect, DRM security model.  Also, by going to streaming, the media companies will most likely be able to finish off Redbox, which is something that they haven’t been able to do in court.

This is all very good for Apple with its Macs and iOS devices and its Maiden, NC data center.

John Dingler, artist

Hi John,
Regarding the subjunctive/conditional, yes.

jfbiii

I’m not even blinking at the increase. And if I do, it will be eye my cable bill warily and wonder if it’s time to cut back there.

As far as Apple, they simply don’t offer the kind of movie/tv service that I want. And, to add insult to injury, the few times that I have spring for a season pass via iTunes, they have not only been unable to consistently post shows in a timely manner but the provider of the content (BBC in this case) provides bonus material at the beginning of the season that they fail to provide throughout the season. Apple should make providers specify the actual contents of season offerings, because right now it’s a crapshoot as to what you get.

The bottom line is that I’ve been underwhelmed by iTunes and over-served by Netflix. As a result, I’m more likely to spend $5 more a month at the latter than the former.

XMG

Although I’m sure that this won’t be the first Dear John letter that you’ve received, I find it ironic that Netflix chooses to send this Dear John letter for what is essentially a “it’s not working out” “it’s not you, it’s me” letter.

JohnnyO

As I wander the Internet reading stories about the Netflix changes, I just scratch my head.

For our family, subscription services to movies works very well.  We feel comfortable nibbling at a movie, and perhaps giving up and trying another, knowing that it won’t cost more.  For that reason, pay per movie doesn’t work for us very well.

I like the streaming convenience of Netflix—so much so that I bought and installed an Apple TV just last week for the improved Netflix experience over the Netflix app on our Tivo.  I am equally frustrated by how few items at Netflix have 5.1 surround sound.  I didn’t spend all this money on a decent home theatre setup just to hear Aliens in stereo!  Thus, I still regularly want discs (Bluray or DVD) until such time that the streaming libraries keep up.

Like many, I suppose, I’ll complain, but end up paying in the end.  What I might do is drop the discs from Netflix (they seem to be shunning them anyway) and continue to use the discs by mail service from Blockbuster that I’ve been using for years.  It is a couple of dollars more per month that the Netflix plan, but I find their movie availability, and their web interface superior to Netflix.

https://www.blockbuster.com/signup/m/plan

Dean Lewis

Luckily I still have local options for DVD and Blu-Ray, so I will probably go to just streaming for Netflix. I’ve kept the one-dvd-at-a-time option because Netflix doesn’t have a lot of the BBC shows I like to watch via stream as well as some old TV shows and things I catch for nostalgia’s sake. But, I’ll be getting an increase of about $5-$6 a month—my local store rents at $0.99 each. Except for being able to keep them as long as I want, it’s now the better deal.

This also puts into question if I really need Netflix streaming. Much of what they offer is available on other streaming services. In fact, a lot of the movies are available on free services like Crackle and others. what am I paying for if they don’t get new content up in a timely manner? And, captions would be nice—that’s very spotty across Netflix’s service. I’m not deaf (yet), but use the captions for when I must keep the volume very low (at work, at home late while people sleep) or just can’t seem to hear what they’re saying (badly mixed audio, I’m looking at you!).

The price change doesn’t seem exorbitant, but it definitely requires taking another look at what is being offered and how it relates to my personal usage.

kevinlane

Well, I’m not falling for a 60% price increase, which is what it would be for me to keep DVD and streaming service that was $9.99.  I’ll go streaming only.  Sorry, Netflix, it may be only $6.00 more a month, but you’re not getting it from me.

skipaq

We discussed this yesterday. We are going with the streaming only option. We may turn on the DVD option for the 2-3 long month winters here in Maine. Or we may just buy a few DVD’s. One thing for sure is we are going to give iTunes a try. Haven’t yet rented a movie through iTunes.

Casey4147

Dropped Streaming, keeping the 2-at-a-time DVD and no blu-ray.  Which is a shame as I finally upgraded the house’s internet connection from DSL to Verizon FIOS.  However, I haven’t used streaming other than to test how it is for quality, and it’s okay but not DVD quality and their selection seems to be shrinking rather than growing and is nowhere near their DVD inventory.  I use NetFlix not for new releases but back catalog titles - TV shows we want to watch again, movies somehow not in our extensive DVD library - and in that capacity I’m okay with $11.99 per month.  The additional $7.00 for streaming, now that it’s separate from DVD’s, isn’t worth it to me for now.

ctopher

I think you’re missing the point. They want to stop sending out those DVDs. The want to move forward. I don’t think this was a bad move on their part.

Think floppy-disk and serial ports. (Oh wait, you did, and you still didn’t get it? I guess that’s the definition of a gored sacred ox!)

I think they’ll be fine.

John Martellaro

ctopher: I thought of that, of course.  It will happen in time.  It’s something that people will convert to as they get better broadband.  But to force the issue now, artificially, seems unwise.  It backs the customer into an uncomfortable corner. It would be preferable if Netflix would gently seduce customers into the future, as their broadband allows.

What I’m seeing as a result is that Netflix customers will now drop a service that was heretofore making Netflix some money. And they’re not particularly loving Netflix for forcing the issue.

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