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“It was just good business”

A Netflix envelope

Netflix’s recent announcement ignited a huge social media and traditional media reaction yesterday. But unlike many of Netflix’s past announcements, the overall response wasn’t positive. In fact, it was deeply negative. There’s no doubt that price hikes in general aren’t popular decisions, but as I read the details, most of what Netflix said made sense for them and wasn’t bad for me. It seemed like much of the Internet, however, took the price increase as nothing less than a vile betrayal along the lines of Peter Pettigrew towards Lily and James Potter (see what I did there? The final Harry Potter movie is out on Friday; the post is about movies).

First, a brief summary of what changed. Before instant streaming, Netflix was a DVD-by-mail business, and you picked how much you wanted to pay per month for the privilege of having 1 or more DVD at home at a time. When Netflix started rolling out their instant streaming service, it was a nice add-on but certainly not worth paying extra for: the selection wasn’t great, and your viewing options were basically PC or Mac, IE, Firefox or Safari.

But as the streaming catalog grew (especially when Netflix started adding full seasons of recent television shows) and more Netflix-ready devices made their way into homes, instant streaming exploded in popularity. The instant streaming was something worth paying for by itself, and last fall, Netflix announced that for the first time, there would be a plan that didn’t include any DVDs; it would just be streaming. This plan would be $7.99 a month, compared to $9.99 a month for streaming and 1 DVD out at a time.

This is what it was before yesterday, when Netflix announced the switch. Now, both plans are $7.99 a month, meaning for the same functionality, you pay $16 a month (a 60% increase). For you Blu-ray addicts out there (myself included), that’s an increase of $10.99 a month to $18 a month (about a 63% increase).

Let’s get one thing straight: this isn’t something Netflix wanted to do. This was something made necessary by two primary factors: rising licensing fees, and rising bandwidth costs.

Netflix has been trying to convince the movie studios for years that they’re the best thing to happen to the movie studios since the VHS tape. And they’re right. Netflix pays for thousands of discounted copies of the movies (which are highly modified to force as much advertising as possible down the renters’ throats) to loan out to their DVD/Blu-ray customers, and the studios get paid licensing fees and royalties for streaming views, if the movie is available in streaming. If the movie’s available in streaming, it’s less likely to be pirated, meaning instead of getting paid nothing, the studio gets something. The studios don’t have to do a thing, except happily let Netflix continue to send them checks. And yet the studios charge more and more for licensing fees, and last year, added a 28-day delay to Netflix rentals so viewers would “buy” the movies. Predictably, the pirates are back to pirating. In order to keep paying the exorbitant licensing fees to have a compelling streaming product to compete with Amazon Instant, Netflix has to have the money.

Netflix’s other issue is bandwidth. It’s pretty jarring that Netflix’s traffic makes up 20% of all IPv4 traffic in North America. They do their best to minimize the traffic using the latest compression technologies, but in the end, streaming 720p+ video is streaming 720p+ video.

So Netflix is facing enormous costs, and by appearances, took drastic action. But I contend that Netflix, at it’s previous pricing level, was drastically underpriced. Harry Potter and the Deathly Hallows: Part 2 opens on Friday, which will cost me $11… and I’m not even seeing it in 3D. For that privilege, I’d have paid $14.50. This is for a two hour movie; by comparison, I probably have Netflix on at least an hour a day at home and go through three or four discs a month, which is about 40 hours of entertainment. At the old pricing structure, that’s $5.50 an hour for Harry Potter ($7 an hour if you feel like eating some popcorn with that movie), and about $0.25 an hour for Netflix. At the new structure, it’s about $0.45 an hour for Netflix. It’s an increase, to be sure, but comparing it to other forms of entertainment should make you realize that Netflix was way underpriced before, and even now, is still a pretty good deal. (And it again highlights the greed of the movie industry, who, sometime this summer, will charge that same $14.50 for a 3D viewing of The Smurfs.)

The only other kind of reaction I’ve seen like that is when Facebook pushes a new design. Facebook users claim to be mortally offended that Facebook knows what’s best for them, threaten to quit, and then…forget about it. They get used to the new design, and inevitably, when the next one rolls out, they flip out again. I see the same thing happening with Netflix: people will threaten to cancel, some actually will. But most will come back. A couple weeks without their favorite Office episodes and I bet most quitters come back, maybe with a revision to their subscription that only includes one service.

While it’s true that the price change isn’t great, it certainly didn’t deserve the visceral reaction it got yesterday. Netflix has been a great company for years, always had great customer service, and is pushing the boundaries of computer science in order to make a more compelling product. What they had to do was necessary, and it’s still a fantastic service, so they deserve some slack, for the time-being anyway.

Originally posted on Cleveland, Curveballs and Common Sense on July 13, 2011 at 11:05 PM. Post text content © 2011 Jimmy Sawczuk. All rights reserved.