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More on Netflix

By Taylor Marvin

Netflix is splitting itself into two companies. The streaming business will remain Netflix, while the mail DVD business will be spun off into a new company, the unfortunately named Qwikster. This move seems to be driven by the rising costs of operating the distribution network required for shipping DVDs, and Netflix’s relative unsuccessful attempt to secure content for streaming at a low enough price to attract consumers. Netflix first attempted to dramatically raise its prices; when it became obvious that it was about to begin hemorrhaging subscribers, they split the company in two.

It isn’t surprising that Netflix has run into this wall: content providers have always been wary of the entire concept of unlimited access to media. This is understandable. Media companies have always wanted a distribution model that forces consumers to pay for content every specific time they consume it — after all, they want to make money. On Demand is the closest they’re going to get to this best of all possible business models, but despite heavy marketing by the cable companies this entire model has never really taken off, mostly because consumers understand that it’s very expensive for what they actually get.

DVD sales are the next best thing. Unfortunately for the media companies DVDs, especially of TV shows, aren’t a great purchase for consumers. I really like the show Community. Because it’s on a network channel, I get to watch episodes of the show when they first air for free (or at least I don’t pay money for it — I pay by viewing ads). If I can’t catch the show when it airs, I can wait and watch it on Hulu or NBC’s video site, again for free. However, if I want to watch an episode again — barring Netflix or pirating — I have buy the DVD box set. However, this is hard to justify from a cost perspective. When it’s free to watch an episode the first time its hard to pay $30 for the ability to watch them again, especially when most consumers will go through and rewatch a show less than a half dozen time a year. Of course, I will buy the DVD set of shows I particularly like or admire — like Game of Thrones — even though the number of times I’m likely to rewatch it doesn’t justify the expense. In a sense this is almost of form of charity: buying a show at least partially to reward the efforts of creators I admire rather than just my desire to rewatch the show. This makes DVD sales a potentially unreliable business model for supporting media companies.

That leaves streaming. But any streaming service — whether it’s Netflix or another competitor — has to compete for at least part of its customer base with pirating, whose only real cost is inconvenience. That competition places a firm ceiling on how much streaming services can charge and retain a comprehensive market. This caught Netflix in a bind: pressure from content providers forced them to raise their price above this ceiling, and subscriptions began to plummet.

That’s part of why Redbox has such a potentially durable business model — unlike Netflix, Redbox is a complement, rather than a substitute, for pirating content. After convenience, presentation is pirating’s greatest weakness: for most people, illegally downloaded movies can’t be displayed on a TV. This isn’t a problem for movies you want to watch by yourself, but it is for social movie watching. This dovetails nicely into Redbox’s content library: the greatest criticism of Redbox is that it’s restricted library is almost entirely comprised of recent hits — mostly action movies, horror, and comedy — which are exactly the kind of movies people are most likely to want to watch with friends. Netflix was always celebrated for offering access to a long tail of foreign or classic films that weren’t avaliable elsewhere, but in many way this was a poor strategy. In addition to having small audiences, these are movies that most people watch alone or with a partner. It’s convenience meant that most people would prefer to watch these types of films in the comforting familiarity of Netflix, but there isn’t a huge marginal cost of pirating these types of films. This particularly hurts because limited audience films are the cornerstone of Netflix’s streaming library, because they’re so much cheaper to license. The only way the newly independent Netflix streaming business is going to match its previous success is if it dramatically improves its streaming library, but the loss of Starz and the continued reluctance of the content providers to buy into the unlimited streaming business makes this unlikely. Again, this bodes poorly for the future of the company and media streaming in general.

Update: Farhad Manjoo has a hilarious observation: “In a sign of how hastily Netflix arrived at this idea, it seems to have forgotten to search for @qwikster on Twitter. That handle is owned by a person whose avatar is an image of Elmo smoking a joint.”

One Comment Post a comment
  1. If we stop buying dvds & don’t pay for streaming, how is the industry going to make any money? As much as we want everything at little or no cost, it could end up killing it!

    October 14, 2011

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