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Netflix Controversy a Sign of the Future; Is Netflix Getting Too Greedy?

Usage Limits and Data Caps: Is this a Sign of Things to Come for Broadband?


Netflix Controversy a Sign of the Future; Is Netflix Getting Too Greedy?
© Netflix

As recently reported by Sandvine, Netflix traffic accounts for an astounding 29.7% of all peak Internet traffic. In the weeks that followed that report, Netflix has angered customers by first significantly raising prices, then enforcing a controversial policy limiting the streaming of media to only one device at a time – preventing one family member from watching a movie on one device while another watches a movie on another.

The pricing increase was a result of Netflix creating two different plans – an unlimited video streaming plan offered at $7.99 a month, and a DVD rental plan staring at $7.99 a month for one DVD at a time, with a two-DVD plan offered at $11.99 a month. This means customers who want the option of video streaming and DVD’s in the mail have to pay at least $16 per month – when they were used to paying $10 per month. In the past, customers could choose to add DVD rentals to their package for an additional $2 per month.

In addition to this – customers will now have substantially less choice when it comes to the streaming option. The Netflix negotiations with Starz failed, removing all Starz programming from the Netflix library – which amounted to the removal of a lot of premium movie content – including movies from Sony and Disney. The Netflix streaming library is comprised of about 20,000 movies and television shows, while the company offers over 120,000 DVD and Blu-ray titles for rental.

The policy of limiting the ability to stream movies to a certain number of devices is directly linked to the DVD by mail plan customers select. For example, the two DVD a month plan allows customers to stream two movies at a time. However, with the streaming plan and DVD mail plans now independent, streaming plan customers can only stream one movie at a time – meaning family members cannot watch two different movies on separate devices, or separate rooms in the house. If streaming only customers want to be able to watch more than one movie at a time, they will need to buy a two or three DVD per month plan – in addition to the streaming plan.

Netflix Competition Comes From Many Fronts

Netflix now faces competition from many different fronts. According to Netflix – its toughest competition may come from “multichannel video-programming distributors” (MVPD), such as Comcast, Time Warner Cable, satellite providers like DirectTV and Dish Network; and even wireline video providers, like Verizon Fios.

Competition from companies in the video streaming field includes Hulu Plus, Amazon Prime, and even network television studio sites such as CBS and NBC. Although traditional style video rental stores are almost obsolete, the Redbox model of low-cost video rentals from kiosks airports, grocery stores, and convenience stores -- and in some markets, Blockbuster Video also are competitors.

In addition to all of that competition – Netflix also competes with many of their own business partners. This was evident with Starz, who control pay-cable rights to movies from Walt Disney Studios and Sony Picture. The original Starz/Netflix deal was made in 2008. At the time, Starz saw the Netflix deal as an additional revenue stream – an estimated $30 million per year for the studio. At that time, online video streaming was a rather small market which would not compete with its traditional television business. However, as evidenced by the latest Sandvine report – this was not the case, and Starz now sees Netflix as a competitor to their subscription TV service.

Netflix Revenues and Customers Have Experienced Substantial Growth

In the first quarter of 2011, things couldn’t have been better for Netflix. Profits were up 88%, and the company added 36 million subscribers globally, with 22.8 million US subscribers. Netflix reported $320 million profit on $2.1 billion in revenue in 2010, and had a market capitalization of $13.3 billion.

With an extremely high growth rate, but limited profit potential because of relatively low fees, some might say Netflix had little choice. However, others -- including many current customers think the recent moves by Netflix will hurt the company in the long run by forcing customers to flee to competitors.

The fact that Netflix faces so much competition Starz, which controls pay-cable rights to movies from Walt Disney Studios and Sony Pictures, signed its current agreement with Netflix in 2008. At that time, online video was watched by only a small number of tech-savvy young people and the estimated $30 million per year the cable network received was seen as new revenue that would have little impact on its traditional television business.

Directly from Netflix: “Our biggest competitor over time may be another service with a similar model to Netflix, such as Hulu Plus, or it may be free on-demand internet video as a part of a consumer’s MVPD package, namely TV Everywhere,” Netflix said in a statement. Recent Netflix Moves May be Sign of Things to Come for Broadband Industry

So what does all this mean in terms of the future of video streaming – and the wider implications for the broadband marketplace? The moves by Netflix reinforce a trend that has been evident with the broadband market as well. As broadband continues to move toward being a commodity – with access increasing rapidly – broadband providers, as well as content providers, will continue looking for new business models to maintain profit margins. Caps, data limitations, usage fees, download restrictions – whatever you want to call it, will be the next trend we will see emerging in the industry. With competition increasing from so many different directions, new pricing models will be the only avenue some companies will see in order to stay competitive, and sustain profitability.

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