Netflix's instant-streaming option is more appealing than ever, in light of a price increase for its DVD rentals. Photo courtesy of Netflix.
Netflix wants you to kick your DVD habit.
The company would much rather you launch the Netflix app on your Roku, Xbox or iPad and watch movies there instead.
That’s the simple explanation behind Netflix’s recent price hike for its DVD rental plan, analysts say. Ideally, the move will encourage customers to sign up for digital streaming plans, which would lower operating costs and increase profits for the company.
“The incentive for Netflix is to push their customers into digital distribution,” said NPD Group analyst Ross Rubin in an interview. “With a DVD customer, in terms of mailing DVDs, Netflix has to deal with damaged discs and inventory,” said Rubin. “There’s many expenses with that part of the business.”
Netflix’s DVD price hike comes off as an aggressive tactic to transition into streaming media, in a time when some brick-and-mortar shops are failing in the wake of digitally distributed media hitting the mainstream. In the past year, both Blockbuster and Borders have filed for bankruptcy and closed hundreds of shops, and many agree that the two companies failed because they were too slow to execute digital solutions to compete against tech-savvy giants Netflix and Amazon.
To its credit, Netflix has ruthlessly executed its digital regime for years. It started out as an online DVD rental service, and later expanded into an unlimited streaming video service accessible through multiple devices, such as the Roku, PlayStation 3, Xbox 360 and Apple TV.
Now Netflix’s goal is to push digital even harder by enticing customers to opt for the streaming plan. Instead of Netflix’s former plan — 10 bucks per month for all-you-can-stream online movies and endless DVDs by mail — the services have been split into two separate plans, ultimately making the streaming service more attractive to customers. For unlimited movie streaming service, you’ll pay eight bucks a month. For unlimited DVDs, you’ll pay eight bucks a month. So if you still want both, it’ll cost you $16 a month total.
Therefore, the incentive for customers who want more bang for their buck — i.e. more movies per month — rests in the streaming plan. If you go the DVD route, you’re only allowed one DVD out at a time. That means waiting for days before you get another flick.
And that’s exactly what Netflix wants.
“They’re driving people away from the model that’s no longer cost-effective for them,” Forrester analyst James McQuivey told Wired.com.
And get this: There’s opportunity for the price changes to sign up even more subscribers. Those who choose a streaming-only service are effectively getting a $2 price decrease on their subscription. For potential customers who don’t care about physical DVDs, a $2 drop may break the threshold that kept them from signing up before. That’s an influx of new cash and new customers for Netflix.
“They’ve probably done the math, and they say, ‘Hey, if we lose 10 percent of our DVD-only customers, but gain 30 percent in streaming customers, in the end, we can invest less in DVDs, have fewer warehouses and have less shipping costs,’” McQuivey added.
Those that still want DVDs but don’t want to lose their streaming service end up being cream to skim from the top for Netflix — an extra $6 per customer who wants to keep both plans.
Which feeds into the second half of the company’s strategy — further fleshing out its streaming services. Right now, Netflix’s big problem lies in access to streaming content. In order to secure more rights to films you can watch online, Netflix has to pony up cash to reluctant studios, all of which are nervous to give up potential DVD sales. If a number of current or future subscribers decide to fork over the extra six bucks for both services, Netflix can turn that cash around and put it to securing more digital content. That means a more robust digital platform, and ultimately, more customers.
Of course, running streaming services to multiple continents isn’t a cheap ordeal. But it’s much less difficult than, say, shipping physical media to different countries over the world. Not to mention their streaming services offer “more variable costs that scale with the business.” In other words, the bigger Netflix’s customer base gets, the easier the server and streaming costs will be to keep down.
And Netflix plans to scale the business for sure. Earlier this month, Netflix expanded its streaming services to 43 countries throughout Latin America for the first time, and the company plans to broaden its service in the future.
“Ultimately this will be a global brand, and everywhere will be streaming,” Netflix vice president of communications Steve Swasey told Wired.com. “We want to emphasize that we’ll be a global streaming service.”
As for the current flurry of consumer backlash, Netflix will weather the storm. Twitter is completely aflutter with customer complaints, and the comments section on Netflix’s blog post announcing the price changes is spinning rapidly out of control. But Swasey said the company “expected the reaction” it’s currently receiving from angry customers, and all of the changes came after months of extensive testing and internal deliberation.
And really, it’s not like everyone is going to up and quit the service immediately.
“The value they offer is too concrete, too good,” said Forrester’s McQuivey. “People aren’t going to walk away from it, because it’s not like you have a lot of alternatives. Netflix is in the driver’s seat, and they can do pretty much what they want.”
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