29 July 2011

Netflix price increase - an experiment?

I have been surprised in reading all of the coverage of Netflix's new pricing scheme, that nothing I read  has pointed out a possible reason for the new structure -- to create two distinct products, one DVD-by-mail and one streaming.  This is one way, perhaps the only real way, for the company to really understand how consumers value the two offerings.

When Netflix launched streaming in 2007, it was positioned as added-value for the mail-based subscription offering.  This brought a number of benefits.  First, it created broad exposure to the service (because every Netflix subscriber has to have access to an Internet connection to manage one's queue, if nothing else).  Second, because the streaming offering was meagre at first, it wasn't a product that could really stand on its own anyway.  Third, when it was launched it only worked on Internet Explorer on Windows PCs -- Macs, Roku, Xbox, Playstation, connected Blu-Rays and TVs, iPhone and ubiquity came later (and added tremendously to the value). Finally, Netflix probably had no idea how popular the streaming option would be.

Watch Instantly became much more attractive with its deal with Starz in 2008, which brought Watch Instantly premium-window movies -- much higher profile content than its streaming offering had offered up to that point (and arguably the best streaming stuff on the service today).  The explosive growth of the service's subscriber base since 2007 certainly suggests that streaming has had a lot of value (end 2Q07 sub count was 6.7 million; end 2Q11 paid sub count was 23.3 million - yowzah!)

Now, by creating two different subscriptions, Netflix will get some real data on how its customers value the different offerings.   Right now, Netflix has extensive data in how they use the services (time spent watching streams, DVDs ordered per month, platforms used for watching those streams), but, as many people know, there is no test for how people really value a service than actually paying cash for it.

To the extent that Netflix wants to add live television channels (like, say Epix or Starz or Disney Channel, for starters -- ad -supported services will be trickier because advertising has different rights issues), they would prefer to have a subscriber count that does not include people who only use and value the mail-based service.

That said, an effective 60% increase for those, like myself, on the one-DVD-unlimited plan sure seems like a big, big jump.  But that is a discussion on which many others have already commented.

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