Another View Of The Netflix Price Hike: It's Speeding Up The Shift To Online Streaming

from the killing-the-cash-cows dept

When Netflix dramatically increased its prices for some subscribers, we immediately suggested that the ridiculously high licensing deals that Hollywood has been demanding were to blame, and wondered if Hollywood was killing the golden goose, by strangling it with high fees. I still think there's something to that, but Ken Doctor has an alternative take that's quite compelling. His argument, supported by Netflix CEO Reed Hastings, is that the price hike -- mainly focused on those using the physical DVD rental business, is designed to speed up the shift to online streaming.

When Netflix shocked everyone by pricing way up DVD-by-mail subscriptions — up to a 60-percent increase — that’s what he was doing: forcing the digital shift. The digital shift is what Hastings wants to happen faster. Right now, 60 percent of his 25 million subscribers are DVD takers, and the majority of the revenue is on that side of the business. He knew when he started the business that he would start with DVDs, but that the long-term business was streaming (“Six Lessons for the News Industry from Reed Hastings“). He just had to wait for the rest of the world to catch up to that vision.

The economics of his business is clear. Charge consumers less (for now) for streaming ($7.99 a month) — and profit more. As he shifts the business, the cost of revenues has already decreased almost two percentage points in a year, from 64.6 percent to 62.8 percent. Lower cost of revenues means higher cross margin, and that’s what investors have loved about the company.

In other words, the price hike isn't necessarily about the higher fees from Hollywood (though that's still there), but about speeding up the company and its customers' shift from relying on DVDs to digital. In some ways, that's really quite a forward-looking view. Most businesses that deal in having to shift their businesses from analog to digital tend to go in the other direction: seeking to delay the shift as long as possible, continuing to squeeze out the cash cow part of the business for as long as possible. You hear that all the time with people in the music, movie, TV and news business, whenever they say things like "we'll shift when there's a proven revenue stream." That's cop-out talk for "we're going to hang onto our old business until it's too late and others have taken our market."

Netflix, on the other hand, may be going in the other direction, actually seeking to be ahead of the curve for many of its customers, and then using the pricing wedge to nudge them forward to going digital only. I'm not sure I fully buy it, but it certainly puts a different spin on things.

Filed Under: digital, disruption, movies, price hike, streaming
Companies: netflix