In defense of Netflix

This post first appeared in the San Jose Mercury News

by Larry Magid

During its quarterly earnings report last week, Netflix admitted that it had lost 800,000 customers since it announced a price increase in June, but I’m not one of them. I continue to find plenty of great programs to watch on Netflix and, for the time being at least, I’m happy to pay $7.99 a month for access to thousands of movies and TV shows.

Apparently I’m not alone. As awful as the 800,000 number sounds, it’s important to note that Netflix ended the quarter with 21.4 million streaming subscriptions and 13.9 million DVD subscriptions. Despite the subscriber loss, a lot of people are sticking with the service.

I’m not uncritical of the company. Netflix’s decision to add 60 percent to the cost for those who wanted to both stream and get DVDs was clearly a boneheaded move. As a landlord of a one-unit rental house, I learned a long time ago that if you’re going to “raise the rent,” you do it gradually over time. You don’t hit people with a sudden whopping price increase.

The next major PR bungle was its decision to rebrand the DVD business as Qwikster and make people go to separate websites for DVDs and streaming. Maybe it should have instead called the new service “QuickSand,” because the dumb move caused the company to sink even further.

While the company has lost maybe 4 percent of its subscribers, it lost nearly 75 percent of its stock value between its peak in July and its depths last week.

 

Starting in March, Netflix will no longer be streaming content from Starz, which provides it with lots of movies including titles from Disney. But as CEO Reed Hastings pointed out, there is plenty of other content available. In his letter to stockholders, he said that Starz accounts for “6 percent of viewing hours.”

The reason that the Netflix price increase didn’t bother me is because I had already stopped using it for DVDs. A lot of people may forget that until November 2010, the company charged $8.99 for unlimited streaming and one DVD at a time but then started offering a $7.99 streaming only service with an extra $2 a month charge for that DVD.

Like a lot of customers, I happily “downgraded” to the streaming-only service because I found myself hardly ever watching DVDs. Those red envelopes would sit around the house for weeks and even $2 a month was too much for a service that I just wasn’t using.

I’m not suggesting that Netflix has all the content I want to watch. I sometimes rent newer titles from Amazon or iTunes and I occasionally still rent DVDs from that kiosk at the grocery store or the one remaining video store in my neighborhood. I also go out to movies now and then and watch movies on airplanes, where I spend far too much time.

I spend relatively little time watching “TV,” and often it’s when I’m exhausted and just in the mood to zone out for awhile. Netflix might not give me the widest or even best selection, but there is always something worthwhile. In fact, some of the programs on Netflix (like terrific documentaries from PBS, the History Channel, Discovery and National Geographic) might actually be more worthwhile than the flicks I might otherwise have watched if I had an unlimited choice.

The big question for Netflix is whether it will be able to continue to provide compelling content. It’s not as if Netflix gets to pick anything it wants. It has to negotiate deals with content owners who, of course, want to extract as much money for the rights as they possibly can.

Part of the problem is that Hollywood is trying to hang on to its old models. Studios like to control their distribution “windows.” They keep movies in theaters for as long as they can get paying customers before dolling out the content to other distribution channels, including DVD and a variety of pay-per-view services before releasing it to premium channels like HBO or unlimited streaming services like Netflix.

Netflix is also battling Internet service providers, some of which want Netflix to pay them to carry video traffic to consumers. According to Sandvine’s Fall 2011 Global Internet Phenomena Report, “Netflix eats up 32.7 percent of peak downstream traffic in United States.”

Overall it accounts for 27.6 percent compared to YouTube’s 10 percent. Last year Comcast demanded that Level 3 Communications, Netflix’s Internet provider, pay a recurring fee to transmit Netflix content to Comcast customers.

Another problem is that Internet service providers are increasingly putting caps on how much data users can download. So far, it’s not a big issue for most home users, but it’s a major issue for the rapidly growing number of people who use mobile carriers to stream video to tablets, laptops and even smartphones and handheld media players.

And, of course, Netflix has some pretty powerful competitors, including Amazon, which offers a far smaller selection of free content to its Prime customers who pay $79 a year and also get free two-day shipping.