Consumer Ignorance

Until last week, I don't think I knew any Netflix subscriber that didn't love the service. Now, it seems like they haven't got a friend left in the world. Netflix had a good thing going; it offered something for a price that was probably a little too good, and I'm actually not surprised that it's now coming to an end.

(from kristipwrs on Flickr)

In reality, Netflix suffers from a problem that a lot of service companies do. Its customers don't understand how the business actually works, and those customers misdirect anger when they aren't happy about something. For proof, search for any popular TV show on Netflix that isn't currently offered as an "Instant" title. There are tons of people who believe that someone at Netflix only needs to push a magical button and any show can stream to every home in American instantly.

The movie rental market makes sense, when you think about it. Netflix buys DVDs on a market. Movie companies make money selling them on that market. Netflix rents out those DVDs, and the money the earn pays for those discs; anything it earns beyond that is profit.

The streaming business is a completely different ballgame. How do movie studios price these products? What's a fair price for Netflix to pay for them, given that a Netflix customer can hypothetically watch as much content as there are hours in the day? If a company doesn't want Netflix to stream its content, it has ultimate veto power. It can't necessarily stop anyone from buying its DVDs on the market, but it has control over digital products.

Movie studios have it made right now. They saw an opportunity to make a lot of easy money selling to Netflix, and they knew Netflix customers would put the blame on the company they once loved. That seems to be exactly how it's playing out.


    On July 22, 2011 rg said...

    I still get two DVDs and unlimited streaming for less than $20 a month. Seems like a good enough deal to me. Sure there are holes in what is available via streaming, but I am way behind on current shows, etc. and I watch at most a couple of hours of television each day, so there is more than enough content for my needs.

    On August 02, 2011 Kent said...

    The operative words aren't "consumer ignorance," they're "market power." Netflix can do this because they're the supplier of a unique service that people can't seem to live without anymore, particularly since movie rental stores have basically disappeared. (Due to Netflix, naturally.) And I think you're overestimating the bargaining power of film distributors in negotiations with Netflix. Not only is it probably easy to put a value on streaming, but Netflix probably has to pay less than you'd think for the right, especially since DVD sales have been falling off so quickly. (Again, due to Netflix.)