Netflix Takes a Dive

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This is one of my more rare opinion posts. I usually try to provide useful information, but I can’t resist publishing some comments about the recent changes to Netflix. I think the change in their business model is unfortunate. Netflix was positioned to remain a leader in streaming and rentals, but I’m very doubtful that will continue to be the case.

The fact that Netflix increased prices wasn’t a shock – I was surprised they waited that long before increasing them. However, the degree of increase was. I think it would have been better to slowly increase rates by a few dollars every year than to suddenly double the cost for streaming and DVD users.

OK. They did it. I wasn’t thrilled but I also wasn’t very upset. I used Instant Watch far more often than I watched a DVD (usually the DVD sat around for a month before it was watched or sent back).

The CEO is currently pushing to have federal laws changed to allow Netflix to share rental history information with Facebook. I think this is just stupid and essentially useless – there’s no real value in automatically posting streaming information to Facebook. It makes more sense to simply post a status update or send a message to a friend if one wishes to share information about a video (I can’t think of a time that I was ever upset because I had to send someone an e-mail, call them, or wait until I spoke with them to mention a movie worth watching).

What’s going to kill Netflix’s position as leader is the division and effective removal of the DVD rental unit. By carving it out of the core business model, and increasing prices, they’ve taken away two thing that put Netflix ahead of other DVD rental and video streaming services. Value and uniqueness (think brand identity).

There are many other streaming services rising quickly. Sure, Netflix probably has the best selection of streaming video, but that can change quickly as the copyright owners modify licensing contract terms.

I can also find other ways to rent DVDs. Or not. Quite frankly, I’ve only continued to rent DVDs from Netflix because it was a bargain when part of the previous plan. I don’t really care that much about renting discs but if I did I would probably just grab something from Red Box. That’s less likely these days. Typically, we’ll rent new movies from iTunes or just purchase them on DVD.

So, in the end, there just isn’t very much that makes Netflix special in its own market. I’m not stating that Netflix will go away but simply that it has significantly weakened its position and will soon become just one of many other video streaming services.

Not long ago I had two shares of Netflix stock, which I bought when it was a good bit lower than its current stock prices. I had originally planned to hang onto them for a very long time, but when it was near its highest price this year I decided to sell. I had a sense that Netflix was going to lose its position, though I had assumed it would more likely be caused by the rise of other services and less to do with changes from Netflix itself. I’m glad I sold them.

Perhaps they’re working on something new. Something very clever that is worth risking alienating customers. However, I don’t think that will be the case.

Treating the DVD plan as though disc-based rentals are “over” is premature. There are many people who still prefer DVDs, others who have no alternatives, and then there’s the most common problem many familiar with Instant Watch encounter all of the time – movies and TV shows are often available only on DVDs.

Updated 10/10/2011: Today Netflix announced that the DVD rental plan would remain within the same Netflix Website. However, I don’t think this will be enough. The real value was the previous cost of the DVD and Instant Watch plan. That is still gone.

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