13Jul/110

Netflix Needs Business 101 Course

Posted by Jennifer

There has been talk for several years now that the newspaper industry was circling the proverbial drain. The business model is out of date, GenX and GenY don't read a physical newspaper, and even Baby Boomers (in some cases) are adopting the concept of reading their daily news on their Kindles, Nooks and iPads. Pricing structures haven't been adjusted to accommodate these technology hounds, so many of them are opting out...choosing to read HuffPo, the Texas Tribune and online versions of print and broadcast media outlets instead of paying the high fees to access the "digital editions" of some of their then-favorite publications.

Napster set the music industry on its ear back in 1999 when audiophiles finally got what they'd been begging for...the ability to obtain music on their terms. The price of CDs had been steadily increasing, and people were no longer willing to pay $20 for an album when they only wanted two or three songs. Metallica drummer Lars Ulrich led the charge against Napster, claiming musicians were the losers in this saga and that fans were hurting their favorite bands by downloading the free tunes. Napster (in its existing form) was shut down, prosecution was threatened for those users who had downloaded the most music, and buyers grudgingly went back to the Best Buys and Circuit Citys of the world to purchase their music. Pretentious artists continued to claim that albums weren't meant to be broken up but that they were intended to be heard in their entirety as a story. You know, because we all understand why that instrumental is called "Snowflake" and that one is called "Purple."

Many users moved to overseas music sites from countries like Russia. Sure it wasn't free like Napster, but at $0.02 to $0.05 per song it was still significantly cheaper than the new kid on the block, Apple, who got into the scene.

iTunes seemingly resolved the issue for the musicians and most fans by allowing them to purchase just the songs they wanted...for $0.99. Often significantly more than the cost-per-song of buying the whole album, fans could now spend $4-5 and get the music they wanted...with cash left over to spend on additional music! But now the price is rising, with many of the newest releases costing more like $1.29 per song...and that's before tax. Buyers are receiving no discounts off CD prices, even though the cost to manufacture the CD is eliminated from this transaction. But the music industry hasn't adjusted their pricing structure for those of us who don't feel the need (or have the storage room for) huge collections of CDs.

Cable television is facing a similar decline. Daily on Twitter, Facebook and Google+ conversations are started by people who have eliminated their cable bills. For years subscribers have complained about paying for channels they didn't want, asking for cafeteria-style plans where they can pay for the channels they want and not for channels they don't want. "Yes, I'd like ESPN, HBO and all the networks, but I don't need any of the shopping channels or kids' programming." Is this really so hard? Of course not, but it would mean huge losses in revenue for TimeWarner, DirecTV, Dish Network and others.

With the advent of Hulu and other television-streaming websites, many people are opting out of cable. Popular "must-see-TV" programming is often available on the network's website, or you can wait just a little while and catch it on Hulu. Why pay for the Disney Channel when you don't have kids? Why pay for FOX Sports Southwest when you're not a sports fan? Seems pretty simple. But thetelevision/cable industry has not adjusted their business plan to suit these modern television watchers.

The most recent blow came yesterday.

Millions flocked to Netflix when the site came online. Rent DVDs via the mail with no late charges? No added fees? SIGN ME UP! We'd all been burned by Blockbuster's ridiculous late policies, and we were tired of it. Create a movie queue. They'll mail your DVD, you watch it at your leisure, send it back, and another movie is promptly on its way. All for a low flat fee.

Then, they added streaming video. You could instantly watch movies and TV series without having to wait for the DVD in the mail. Wow! Even better! SIGN ME UP!

Yesterday, Netflix announced a price hike - of as much as 62%, depending on your plan - effective September 1 for existing members (and effective immediately for new customers). Their blog blew up. Commenting shut down at the maximum 5,000 comments within hours. As of the publication of this post more than 33,000 people have commented on their Facebook page, where they posted the same rate increase information.

Basically, Netflix figured out they could split the plans (no more joint DVD/streaming plans) and charge more, while convincing you you're getting a deal! My plan will go from $9.99 (before tax) to $15.98 (before tax) on September 1.

Sure, we all understood that Netflix was a pretty great deal. I love getting my DVD in the mail but also being able to watch previous seasons of great shows like NBC's Parks and Recreation, since I didn't start watching until very recently. But, only seasons 1 and 2 are available to stream. For season 3 I have to order DVDs...and the episodes are split out into three DVDs.

Fans are livid, and rightly so. If the products were equal (meaning, the same items available on DVD were ALL available to stream), I would gladly drop my DVD plan and just use their streaming service, thereby reducing my overall monthly plan. But it doesn't work that way. The newest-run items are only available on DVD, so to get full value (and not have to wait 4-5 days in between receiving new DVDs) most people have both DVD and streaming.

Why does our entertainment and news sector (those people who are supposed to be our best, brightest and most forward thinking) seem to have the most trouble adapting to the curves of their own product life cycles? It's been a great run guys, but the times, they are a-changin'. If you can't figure out how to make your products - or at least your pricing structure - more relevant to today's buyer, then you're going to get left behind. Yes, it's going to mean you don't make as much money, but I bet that's going to be ok with the average consumer (maybe you'll have to give up one of your vacation homes). The movie industry made billions last year off ticket sales of first-run movies. Music companies and record labels made billions off concert promotions and new album sales. Netflix alone reported $47.1 million in 4th quarter earnings in 2010 and sales of nearly $600 million.

Consumers no longer have the tolerance for overpriced (and under-producing) goods and services. They literally can't afford them. We've been in a recession for nearly four years. Brands that can't stay relevant in this environment run the risk of becoming obsolete before the market even begins to turn. Know your audience. Know your strengths (and, more importantly, weaknesses) and know your competition. RedBox's $1 movie rentals are looking pretty good to this gal right now...

   
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