We've Seen This Movie Before

Netflix announced last week that it's raising its prices on DVD rentals and starting to focus on transitioning its business to streaming video. This is dumb and dumber, especially since we saw Blockbuster lose its way somewhat similarly over a decade ago.

The price increase was announced with no added service or benefit; it's simply going to cost customers as much as 20% more to do the same things they did before the price hike, while Netflix spends more money developing streaming technology than it does buying DVDs for its customers to rent at the higher prices.

Already confused? Me too, though the logic (I think) is that Netflix believes all the technology hype that is busily transforming its image of itself. "We're now primarily a streaming video company," co-founder and CEO Reed Hastings proudly declared when his company announced the price hike. The stock analysts who propagate and then consume such nonsense paid him with a big leap in the stock price.

Here's why it makes no sense:

• Technology isn't the solution, because it isn't the problem. Netflix could announce that it's developing a way to beam movies directly into consumers' brains and unless it was proprietarily impossible to even partially knockoff, it wouldn't matter. Transmission is a commodity business, whatever the medium, and when it comes to streaming the question isn't how Netflix will embrace it but rather what media distributor isn't doing or planning on doing the exact same thing? Its brand name on a computer icon isn't worth much. There's no strategy there.

• Members are only mislabeled customers. Netflix claims it could have 19 million subscribers by the end of next year, and some have suggested that this constitutes a monopoly (which led to the exploitative price increase). Maybe this factored into the decision but I think it's more broadly an all-too common misread of business reality. Membership is primarily a function of the financing requirements of the rental model; nobody chooses to join Netflix like they'd choose to join a club. It's the required label for their transactions. And they'll be loyal renters until one of any number of other (and cheaper) alternatives presents itself. There's nothing reliable about these relationships.

• Knowledge is the only way forward. Forget the brand name. Skip the membership fantasy. The only advantage Netflix possesses over its competition is the viewership records of its customers, which means it knows a lot about what those individuals (and households) might want to see in the future. This should form the basis for a new model for its business: providing intelligence to movie makers; allowing them to cut deals with select studios to share in profits; and give its members a far more facilitated and meaningful guide to content. Less pipes and more smart menus. Imagine if the company could extrapolate from its knowledge of mainstream film consumption to make predictive offers on noncommercial content (i.e. become an authority on video across the web, for a price, of course).

Why the comparison to Blockbuster? Because the video-rental chain saw the exact same trends being hyped by journalists and analysts over 15 years ago. It also reacted, though far slower than Netflix but equally as stupidly. Blockbuster possessed the same sort of insight into the content tastes of many millions of consumers yet ignored it, choosing instead to respond to the pressures on its business by filling its stores with crap, treating its employees like dogs, and hoping to extract as much money from the enterprise as it possibly could before the thing went under.

Netflix doesn't seem that excruciatingly misguided, but its recently announced strategy demands to be challenged and, if required, recast. There's very possibly a viable sequel for the brand, but the manner in which it's consumed won't matter. It has to be able to tell consumers why it knows they'll want to see it.

(Full disclosure: I ran marketing communications at Blockbuster from 1993 to 1996 or so, and I vowed to stop writing about what I wish we’d done. Oops.)

(Image credit: A screen grab from A Clockwork Orange, found on The Warren Report)

Comments

[Jonathan]

Nir, I hear you. My position is still that anybody reading this blog should sell Netflix now.

[Nir Kossovsky]

Sorry, Jonathan. Have to respectfully disagree and remind you that complaining neighbors may not be a good leading indicator.

Over the trailing twelve months, Netflicks (NASDAQ:NFLX) has outperformed the median of its peer group by 231% suggesting that management may have some notion of how to make money; S&P announced this week that NFLX is being elevated to the S&P500 (large cap) index. That pushed up their stock an additional 1.7%.

There will always be a niche market for renting DVDs (and
VHS tapes, and vinyl records); but providing services for physical goods is much more expensive than streaming. I guess they figured that that broadband is distributed widely enough that the cost of customers lost will be covered by costs saved.

[Jonathan]

Also, and this is TOTALLY anecdotal, but they started closing down Blockbuster outlets in my area last month and I can't count how many people have complained that now they don't know what to do about renting movies. Lots.

I will go to my grave believing that there was a way to profitably run the DVD rental business, whether retail or mail order.

[denise lee yohn]

right on, jonathan -- has netflix so maxed out the growth potential of its current business model that it needs to make this change? i don't think so. -- denise lee yohn