Friday, July 15

Increasing Rates: Netflix Actions Speak Louder

NetflixThe writing was already on the wall, but it wasn't writing that sent the real message. Netflix doesn't want to be in the DVD shopping and shipping business anymore. If you want to hold a movie in your hands, you are better off visiting your local Redbox.

The new price increase reflects its decision. Never mind those sensational headlines that scream 60 percent increases. The new plans are pretty straightforward. People can choose unlimited streaming (no DVDs) for $7.99 a month, unlimited DVDs one at a time (no streaming), for $7.99 a month (Blu-Ray is $2 more), or both services for $15.98 a month (with a broader selection).

If you're nutty, you can have as many as four DVDs out at one time. The price for that service is $34.99 per month.

Some people are complaining, saying that they will dump the DVDs all together and Netflix will lose money. No they won't. As soon as the company can dump DVDs and Blu-Ray, the better. The entire point of the price fix is to force you to make the choice that Netflix has already made. CEO Reed Hastings has said it.

"We are now primarily a streaming video company," Hastings said.

Initially, Netflix investors couldn't be more thrilled (although some started selling as customers pushed back). They had every reason to be thrilled, because unless you cancel the service, there is a plan. And the plan looks pretty great on paper. In fact, there are more changes that Netflix is looking at, including scrubbing the household model customers are used to and moving everything to an individual member basis.

"When our focus was primarily DVD rental, we talked about our opportunity in terms of households, in particular the number of households with broadband access, which is more than 70 million households. Another way to view our potential opportunity is to consider the number of households that subscribe to home entertainment, which includes cable and satellite subscribers, a market estimated at about $68 billion in annual revenue. In either case, we were describing a very big potential market, giving us a lot of room to grow.

More recently, as streaming has become central to our business, we believe there may be an opportunity to change our focus from a household relationship to an individual relationship, since streaming is viewed on personal devices, such as phones, tablets, and laptops, as well as on shared large screen televisions. As we think about this long-term shift from a household to a personal relationship, we are starting to think internally that our opportunity could be viewed as the number of mobile phone subscribers, a group that both invests in electronic content and can afford $7.99 for home entertainment. Needless to say, that is a large opportunity.

The evolution toward individual memberships will take time, and we are still thinking about how to best do it. One option could be to allow an account to add additional concurrent streams (using the analogy of our DVD business, it would be like choosing a higher-priced plan that allows a subscriber to have more DVDs at home). Or it could be that there is a price point that would encourage multiple accounts in one household. In either case, our long-term goal is to evolve the Netflix service so that it feels more natural to have a personal account. We will also be working on broader Facebook integration which we hope will further the notion of personal accounts." — Netflix, July 14, 2011


Every communication counts when choosing a service provider.

Personally, this is one of the fundamental flaws with most media "rental" agreements. The companies in charge are empowered to rescind their contracts, raise rates, and change services any time they want. This extends to not only Netflix services but cable and satellite companies too.

Netflix ScreenBut where Netflix really stands out is in its blatant mission to not only increase its rates today, but tomorrow too. It has been sharing this news with investors for some time; customers not so much. The Investor FAQ says it all. They want to manipulate customers into streaming only and then divide their accounts among individuals inside the household.

More than likely, customers will do it too. Sure, there will be some grumbling, but entertainment addiction is alive and well. Most of us gave up free broadcast for upwards of $100 or even $200 a month services (plus mobile) and we still purchase DVDs or their digital equivalent anyway.

At the moment, Netflix is hoping you won't notice the above graphs and it expects the colorful commentary to die down. Maybe it will. Maybe it won't. Personally, I'm split. But then again, I'm not a Netflix customer.

Don't get me wrong. The communication was rotten. Netflix could have phased it in much like it plans to phase in personal accounts over household accounts, making it so people don't notice so much and "feel more natural." But at the same time, the only recourse Netflix customers have (short of organizing with stated objectives) is to dump the service en masse.

I don't think they will. I think most will do exactly what Netflix wants. Netflix wants to get out of the mailing business, which costs considerably more than its streaming arrangement. So, if you dump mail, you're not really protesting at all — you're doing Netflix a favor. That favor isn't nearly as big as the favor you will do when everybody in your home wants an individual account, but this is clearly the first step to make it happen.

It's a plan that is, very literally, worth billions for a company that suddenly makes people reminisce about Blockbuster. But for communication pros, the real lesson goes back to not mixing your investor and customer messages. Everything is public nowadays.
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