July 16, 2012
CNET recently profiled the year leading up to the whole price hike and Qwikster debacle. Just months before, Reed Hastings had been nominated CEO of the year, and was admired by everyone in tech.
What Hastings faced was the pure Innovator’s Dilemma: how to maintain your sustaining business while growing the future business and not alienating current customers. There’s no doubt that we are moving to an all online movie world, discs are a thing of the past.
What sticks out about this story is the haste that decisions were rolled out. You have to admire a CEO that will act and not talk about it in meetings all day. The issue was the incorrect underlying assumption that not many people would care about the price hike:
Two weeks later, when the company reported second-quarter earnings, Hastings said in a letter to investors that the company was sorry for upsetting subscribers, but he predicted that most wouldn’t cancel. In the same letter, Hastings also clumsily added that the increase would likely help Netflix for the first time top $1 billion in quarterly revenue.
Whenever a price changes, people have to decide if it something is still worth paying for. There were most likely too many people who had the same discs sitting at home for weeks or months who realized they weren’t making full use of the service. You remind them that they’d been meaning to cancel for a while anyways.
I do think that Netflix will recover. Their biggest issue today is content acquisition. Studios get that this new model means less big bang up front from a DVD release. The interesting analysis though is if in the long run, the regular income from subscriptions can add up to more than people are spending on DVD purchases.
I’m sure a large number of customers would pay considerably more than the current $7-$8 per month for access to new and recent releases, even if they are time delayed.
My guess is yes. Even priced at $30/month for access to full movie catalogs (go ahead and time delay them 30-45 days from DVD purchases), Netflix 20 million+ customers would be a sizable chunk of money.
The disruption in this space over the coming decade will be fascinating.