The answer to Netflix’s streaming troubles

As you might have heard, Netflix raised its prices yesterday, quite significantly. In all honesty, their prices are still very competitive ($15 for DVD + unlimited-streaming), given that an HD basic subscription to cable TV is still in the range of $80-$90 a month. Techcrunch, Gizmodo, Engadget all wrote editorials on the situation.

A lot of people were unhappy about the sudden price hike, but I think most people do know that the reason for this increase was not greed, but rather the realities of content licensing. Licensing content for unlimited streaming is simply extremely expensive. Some TV shows Netflix bought for streaming were sold at $100,000 per episode (with “Mad Men” sold higher than that), while some newer big movies are in the millions of dollars range.

This is an unsustainable model.

Currently, Netflix’s streaming library is rather small (and it already has cost them a fortune), and content expires within 2 years, and in some cases as early as in a few weeks. Some content is not in HD either, as part of the negotiations.

The root of the problem is that the content providers want to make their content “scarcely available“. Anything that’s more difficult to find, has a higher price in the market place — just like gold. This way they can sell the same content to different TV networks, online streamers, different countries, airliners etc, for a higher price. In fact, it’s widely known that titles that Netflix is streaming, the TV networks won’t touch, not even with a 10ft pole. This is a problem for the content providers, and that’s why they universally hate, and fight Netflix.

I do not believe that things will get easier for Netflix. The numbers just don’t add up. They’re stuck between a rock and a hard place. From one side its customers want more content selection (without more price hikes), while on the other side content providers hike their asking prices to the extreme, and in some cases they won’t even negotiate with Netflix regarding streaming. And at the same time the number of titles is increasing, making licensing even more of an expensive proposition.

I think that there’s only one answer to this chicken-and-egg problem: an open marketplace within Netflix streaming. A type of pay-per-view, but with Netflix paying part of the bill, and with studios setting their own prices. So for example, instead of DVD + Unlimited-Streaming costing $15, it should cost $10 ($8 for the DVD, and $2 for streaming). That $2 dollars will go towards hosting, bandwidth, and license-sharing costs. So instead of paying $4 to stream a movie (as it costs on Amazon or iTunes), the Netflix user could pay as high as $4, but he could also pay as low as $0.10 too. Instead of having fixed prices, let the market decide. Let the studios set the price they think their content deserves. Eventually, the big studios will realize that making $150 mil movies is not so sustainable anymore, when smaller indie studios can do the same for $15 mil. We’re getting there filmmaking-wise. That’s why the market place should be open, and without set prices per title.

Yes, it would be nice to pay a moderately-cheap flat fee and watch everything under the sun, but as I wrote above, this is an unsustainable business model when content providers are that greedy. In a perfect world unlimited streaming for a flat fee is the best solution for the consumer, and a piracy deterrent. I believe this for both movies and music. But studios/majors are a–holes. That’s why I believe that my solution is the next-best thing, at least for movies.

In the past, indie studios could not compete with the big studios because the cinema prices are fixed. They’re between $8 and $13, depending where you live. But no matter what movie you were going to see, the price was almost the same. So who in their right mind would go watch an indie or foreign movie, when for the same amount of money he could go see Harry Potter?

This is the situation Netflix should try to change. Eventually people will discover more cerebral movies, for cheaper than a brainless blockbuster. Cheap thrills won’t be cheap anymore. And the big studios won’t have any recourse, but to bring their prices down. The same way it happened with music in the last 3-4 years: Major studio albums were sold as high as $13 on iTunes, and then the indies started selling at $8. Now, the price of the major albums has come down to $10 (sometimes cheaper), while a lot of indie albums are selling for $5 or $6 on Amazon MP3. As tools become cheaper, and there is competition, prices will come down. For blockbuster movies, it’s a matter of outsourcing CGI and most locations to poor (but politically stable) countries to bring costs down.

I think all this will start to happen by the end of the decade. But until then, we will have to endure studios chocking Netflix, which in turn has to choke us. And in the mean time, piracy thrives, just because people can’t get their entertainment for cheap-enough and available-enough.


Omniscient Eyes wrote on July 14th, 2011 at 10:31 AM PST:

$$$$$$$ It’s all about the MONEY. I was listening to Howard Stern this morn and he was talking about how Hollywood throws around money like its water. They do that because they know the content they provide can only be done by them and they know they can charge for it (for the time being). I admit, when I first got the email of the fee-hike (I currently have the DVD + Streaming combo), I was like WTF! I am cancelling this sh*t. I suppose I didnt take into account how much Netflix has to fork over for the rights, which now has me debating what I’m gunna do. I do think you’re right that movies will follow suit with the way music has gone, though. As the hardware gets cheaper to shoot indie stuff and the resources become more affordably available for post-work, I think the big studios will start to realize the entire game is changing… maybe they already do?

Mike wrote on July 18th, 2011 at 10:07 PM PST:

Rambling here……..

Netflix’s issue is that they simply underpriced the cost of DVD rental. When people (like me) saw the deal coupled with the bonus of streaming, it was a no brainer.

Of course, soon enough, I found the streaming content sucked and just rented more DVD’s.

………Netflix admitted that the price increase is really a way for them to recoup the loss of all the DVD mailing……

Ideally, they’d like everyone to stream, but some 20% of the people in the USA are not able to do that.

Personally, with a high speed cable connection (higher than the normal base offering) it was always crapping out in the middle of a movie with buffering. So, even from a technical point it’s not good enough.

Two strikes: Content and Streamability
Third strike and your out: Cost for value

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