As for the drop in subscriber numbers, it's understandable that people don't like price hikes, but losing less-profitable DVD customers may not be a bad thing in the long run. Postage and regional distribution centers are a drag on the company. Reducing those costs frees up funds for content distribution deals.
A lot of people seem to think that the recent price changes are done to discourage dvd rentals because they are less profitable.
I see it the other way, the recent separation in prices were done to isolate dvd profits from the rest of netflix. Make no mistake that the studios are already working on deals that will bleed netflix dry. They will look to squeeze every last penny of profit out of the streaming division. By separating the 2 units, netflix is making sure the dvd unit can chug along merrily with their relatively fixed profits that the studios can't bargain for.
I believe the studios will push people back to using streams that are 'free' and see their revenue go down to zero. I hope that eventually they will learn that the 'economic' cost of getting their content is limited by the 'opportunity' cost.
I completely agree, Netflix is about to face the same problem that cable and satellite operators have faced for years, which is having every provider come at them demanding a fixed cut of subscriber revenue. If the top 6 ( http://en.wikipedia.org/wiki/Major_film_studio#Today.27s_Big... ) had their way, they would each demand at least $5 per subscriber for access to their content. The next 5 years are going to see netflix increasingly operating the streaming division on a razor thin profit margin while jacking up prices.
I am not an expert on the industry, but from my armchair I think netflix will live or die by offering productions a better deal directly than the big studios. I expect some sort of anti-trust legal fight in an attempt to limit the lock in measures the big studios can put in the contracts they leverage.
Certainly if I were Netflix I would be thinking along those lines. Clearly the move to lock in some original content was part of the game here. The 'learning' that has to happen for the big content folks is the difference between 'some money' and 'no money.' Hopefully Netflix will help educate them in that regard.
Fewer subscribers = lower revenues. <- That's the problem.
Fewer subscribers = More articles about fewer subscribers = FUD = Lower stock price <- Not the problem.
The movement of the stock price doesn't affect Netflix' viability as a business. Kudos to them for making the business more targeted towards online streaming. I hated having to pay for physical DVDs when all I used was streaming. I switched my plan as soon as I could.
I don't use Netflix all the time. For most shows, I auto-steal them after they air. For casual watching, I use Netflix and watch things like Pawn Stars, Trailer Park Boys, and other series long after they've aired. It fills the "I just want to flip on the TV and see something I wasn't expecting. I don't care what it is" need.
I'd break their costs down into per-byte costs and per-subscriber costs. The fixed content costs are only fixed until they renegotiate their contracts. Most media businesses look to merge with the content creators to eliminate those costs altogether.
I believe the real discussion going on is whether Netflix has a viable long-term business model. I believe they do, and I'm glad they got rid of DVDs.
25 million customers at $10/month was the old calculus;
24 million customers at $16/month is the new calculus;
I don't see any problem here. At all. (Okay, I'm handwaving because I'm too lazy to actually look up the revenue figures, but losing subscribers when you raise your prices is not necessarily a bad thing at all.)
This is not an accurate estimation because not all of the old customers were on the same $10/month plan, and not all of the 24 million (forecasted) customers are on the $16/month plan.
It's not accurate, but think about it: 25M to 24M is only a 4% decrease; $10 to $16 for the dvd+streaming plan is a 60% increase, and even if that translates to only (say) a 6% increase in average revenue per customer, they're safe.
This is a transient reaction. They still habe 24M subscribers, are a monopoly in their field, and are robustly expanding in other countries.
The real danger to Netflix is not subs leaving because of price hikes (what alternative do you have really, shell out $70 per month to Comcast for horrible TV content?) but disruptions to their content sources, like the recent Staz debacle.
I'm curious as to why you think they are a monopoly in their field? On any given evening, when I want to watch video content, it's a total coin toss as to whether I (a) end up buying on iTunes, (b) Go watch with amazon prime, (c) Use netflix, (d) bittorent the content.
I end up with (d) only when the content is not available on the first three. I can't say I have any particular bias - so "monopoly" is perhaps an overly strong word.
"Monopoly" refers to their share of a particular market, not their share of how you personally watch video. I don't think Amazon's streaming numbers even compare and Bittorrent is not a commercial entity. iTunes is kind of a competitor, but their business model is so different that it's questionable whether they're really competing for the same people in general.
Amazon's numbers might not compare right now, but they are very well positioned to elbow their way into Netflix's market.
I found an estimate[1] that Amazon has 121-131 million customers, of which about 5 million are Prime members. Those prime members pay less per year than a Netflix streaming customer, and they pay it mostly to get free 2-day shipping, so they're already deriving a lot of value from it even without the streaming. Amazon just dropped a big library (although not as big as netflix's...yet) of free streaming videos in their laps. Word will spread, plus they get to advertise this new service essentially for free to their other 120M+ customers. They also have tons of servers to handle all of this.
Amazon could also elbow in on netflix's DVD rental service pretty easily. They already have a worldwide rapid-shipping system in place, including handling plenty of returns. I'm sure they could add DVD rentals with two-day shipping each way if they wanted to. I'm guessing they don't want to, because they don't see a lot of profit in it, and maybe also because it could hurt their already-established business of selling DVDs.
Here's the question: of those 5M Prime members, have many are prime Prime and how many are through the friends and relatives? I'm an Amazon Prime member through a friend (i.e. I didn't pay the $75, I think a Prime member can have up to four people use Prime services) and Amazon doesn't let me stream videos.
I honestly don't know. It might also include people that get Prime for free (new moms, college students, etc.), who also don't get streaming video. Assuming that the 5M figure is correct, and that it includes everyone with access to Prime shipping, it might be as little as 1M or less who qualify for the free streaming, although my gut tells me it's probably a lot more than that.
All that being said, I don't think it's all that important. I wasn't trying to imply that 5M current Prime members compare to 24M Netflix streaming customers; I was trying to say that they have a really big foot in the door, which they could use to rapidly leverage their way into the market. The more important number are the 120M+ customers. Amazon can pitch them with, "You didn't want Prime for shipping, but maybe you'd like it for videos! (Especially if you're dissatisfied with Netflix!)" There are also rumors that they will soon let Prime members "rent" eBooks on their kindles for free (with a limit on the number of titles they can have at any given time). That would pull more people into Prime, and some of those people would inevitably take advantage of the free streaming.
chc's answer is relevant. In addition I want to say that (d) is out for most users and so is (a), at least in its current instantiation; if Apple does a better job with Apple TV... who knows (also the below point applies).
Amazon is formidable competitor, but their collection is tiny when compared to Netflix's DVD collection, and is still small when compared to their streaming content. So, on a Friday night, my options are generally:
Netflix streaming Large selection, trivial to use
Redbox Super tiny selection of blockbusters, $1, needs a drive
Amazon Small collection, need to pay on top of my Netflix subscription
YouTube Good luck with finding the content and in one piece, need to connect the laptop to TV, or a box, e.g. Google TV (although my wife watches soap Operas from our home country that way, can't get it anywhere else).
bittorrent HUGE amount of content, although I've never done it, the virus risk and illegality puts me off
> bittorrent HUGE amount of content, although I've never done it, the virus risk
For being such a tech-savvy group of people, I'm rather disappointed to have heard this line so often from HNers. When was the last time there was an exploit found in the codecs for popular formats such as XViD or x264?
Exactly. If there is no revolution in content creation, then Netflix is doomed. Distribution and content creation are inexorably linked. Netflix needs to produce content.
If I can respectfully disagree, I believe content creation is unlimited. There's a quality-quantity curve, sure. Independent films make up for post-production quality by having great writing and acting.
I feel this way because I'm convinced the internet is revolutionizing distribution. Therefore, Netflix is way ahead of the game (if you buy what I'm saying).
Production costs are plummeting anyway - it's just that big-budget movies always spend about the same amount, but now that money goes farther.
That was the same mistake I made. I cancelled sometime at the beginning of last week. With a better part of the month ahead, it was very strange to see a message like that from Netflix (who have been very good in the past as far as customer service goes)
> Return outstanding DVDs within 7 days of cancelling to avoid charges to your credit card.
> Cancellation will be effective immediately - no refunds for partial months.
> Instant streaming on your computer or via any Netflix ready device will no longer be available.
I also went to cancel but Netflix placed the "No partial months" stipulation as the second sentence on the page. They did not bury the terms and they did nothing underhanded as your post implies.
That's horrible. This article did also remind me to cancel my streaming (but now I'll wait until the end of the month ;-). I'm going the surprising route of doubling down on DVDs now.
No surprise to me - I'd prefer the DVD route myself. The streaming service has a fraction of the content and is apparently destined to grow smaller, or more expensive, if the Starz news is any kind of bellwether.
My fear now is that the golden age of rental DVDs will come to an end before I have finished enjoying it. I want to be able to watch older or obscurer films, and the disks are better for that, probably because they don't require me or the rental company to acquire and maintain a stupid never-ending oft-renegotiated contract with a movie studio and its lawyers.
While I doubt that the market for older and obscure DVD rentals is going anywhere, most of the titles you seek are likely available in your library system. Ordering them on (free) loan from nearby branches would take about as long as Netflix would to postal mail it.
I canceled streaming (and kept DVDs) the other day and it takes effect at the next billing cycle. If they don't want to offer refunds, they could at least make cancellation effective at the end of the already-paid-for month.
When was the last time they gave partial refunds? I think this was the case even years ago. I agree with the tone of the wording though; it has that passive aggressiveness that we paying customers shouldn't have to endure.
I think there's a lot of overreacting. Personally, I don't really see any alternative to Netflix, even though their selection sucks here. I don't have cable so no option there. Hulu isn't available in Canada, most websites like NBC or ComedyCentral don't allow us to view either. Amazon rentals or buying is so much more expensive, I'd get a handful of movies for the same price as unlimited Netflix. So again, who gives a better deal than Netflix?
Free streaming of certain movies/TV shows on Amazon with a Prime membership is arguably a better value. Selection seems to be mostly the same as Netflix, though device penetration is far more shallow. Still works on my Roku, though.
IMHO, Amazon's free collection that comes with a Prime membership is quite horrible. Or maybe you like different stuff than me.
And their interface on Roku is even worse
- ugly, long lists of movies with no way to search or skip through the list
- all seasons for a series (I think Doctor Who has some 20+ seasons there) are placed in the above list as individual shows (rather than being grouped together), and are not even in chronological order
Netflix's interface on Roku is a godsend in comparison.
No argument about the interface. In fact, I'd say most of the interfaces on Roku leave something to be desired (especially Hulu!).
I'm basing my catalog comparison on the fact that I found most of the things I watch with Netflix also on Amazon. Maybe my particular interests have a strong intersection with Amazon's selection, though.
In the US, Amazon Prime offers free streaming very similar to Netflix. It comes with your regular Amazon Prime membership that gives you free two day shipping on everything. The selection is obviously not nearly as thorough as Netflix (which from what I hear is poor to begin with), but I have few doubts about Amazon's ability to catch up.
I never understood why Netflix effectively divorced their two major offerings. At one point, it made sense to carry the DVD subscription even if you're primarily a streaming customer.
However, as they currently structure it, these two services (DVD vs. streaming) could be separate companies and now almost compete for the same dollars.
Also I wonder if the loss of Starz is a bigger impact to their stock price than the lack of subscriber growth.
The offerings got divorced because Netflix was starting to trip on problems related to too many people on streaming for their existing (cheap) licensing deals, and deals were coming up for renewal at (not cheap) pricing. So they needed to make more money off the streaming users to be able to pay for more expensive licensing deals.
Example: Netflix licensed content from Starz for $30 million/year. Starz licensed content from Sony, but agreed that only a certain number of people would watch via the internet. So Sony movies got pulled from Netflix "temporarily". And Netflix had to up their offer for Starz from $30 million/year to $300 million/year - and Starz decided it still wasn't enough, because they were worried about people watching their stuff for $8/month hurting their other $1.3 billion/year revenue stream.
Not so sure about that, they just split the offerings which is already causing a lot of users to evaluate their subscriptions, hearing about the ending of the Starz contract will affect that decision.
I love the concept and want to support the company, but I feel like the value of their offering just dropped drastically (I lost the DVDs by mail, so down to half the content, then losing Starz means that I'm essentially getting 1/4 of the content - if that - for the same price).
Previously we just let the subscription get charged, even if we had a busy month and didn't watch anything, but I feel like if I'm going to have to go to that "Change Account" screen then "Cancel" is going to be the most appealing option.
Netflix needs to do a better job of engaging it's customers and explaining the reasons behind the price hikes, and offering an incentive to stay - even if it's "hey, the studios are screwing us, please stick by us and be part of ending that messed-up system".
Netflix is stuck between a rock and a hard place. They don't control the content (the studios) and they don't control the distribution infrastructure (Amazon). They have a large subscriber base but it's just been shown that that might be fleeting. Netflix can't ride any network effect from their customer base. In short, their market position is indefensible. Their suppliers have the interest and ability to wring any profit margin out of them. If the suppliers demand too much, it's just an incentive for the consumers to buy direct from the source.
That doesn't say that Amazon is their CDN at all. They probably use AWS for pages and user-oriented stuff, but content delivery is done through Level 3 [1].
The movie companies are just shooting themselves in the foot. If I can't find it on Netflix or download a copy for a reasonable price (I'd pay a couple bucks to download a movie and have permanent copy...), I'll torrent it. Their loss.
I definitely agree that the content producers are taking a short-sighted POV here. And while another poster argued "you're not their target market," I disagree. It might be mostly geeks and power-users who go to bittorrent at the moment, but if they make their content progressively harder and harder to get hold of (which seems to be the case) I predict more and more people will switch to torrenting the content.
I don't know, maybe the percentage of people who use bittorrent will remain small enough that it won't really affect the studios, but their tactics strike me as self-defeating. I mean, nobody wants to have to jump through hoops to get to the content they want to watch. When torrenting becomes the path of least resistance, it'll be interesting to see what happens.
>> make their content progressively harder and harder to get hold of (which seems to be the case) I predict more and more people will switch to torrenting the content.
You have to keep this in the context of the non-tech mass market. For them, the content is on TV now. Turning on the TV is easy. The studios aren't making content harder to get as long as it's available on TV. Netflix/iTunes/torrenting is not easier than turning on the TV (for most people). Most people don't consider turning on the TV to be a difficult hoop to jump through.
Yes, I know that some shows aren't available in some countries. But then, the vast majority of people are likely not even aware of shows that don't air in their markets (i.e. foreign shows).
> You have to keep this in the context of the non-tech mass market. For them, the content is on TV now.
Some of it is, yes. If we were talking only about television programming, I'd agree this is mostly true. I mean to be referring to content in a broader sense though, although I might not have made that point explicitly.
> Turning on the TV is easy. The studios aren't making content harder to get as long as it's available on TV.
Right, it's easy to turn on the TV, but is the content you want on? At a time when it's convenient / possible for you to watch? I mean, one reason things like VCRs, Tivo, Netflix, bittorrent, etc. became popular in the first place is because the content wasn't conveniently accessible by simply being in front of the TV at the right time.
> Netflix/iTunes/torrenting is not easier than turning on the TV (for most people).
I don't know... sometimes I think us geeks overstate the difference between "us and them" where "them" are "the unwashed, untechnical masses who are deathly afraid of technology" or whatever. I mean, yeah, there probably are more people who aren't using, say, iTunes, than people who are... but I'm guessing that penetration of this kind of technology is growing and that a larger and larger group of people are starting to care about the kind of convenient access you (can|could|whatever) get from iTunes, Netflix, bittorrent, etc. Maybe I'm wrong, but that's just my perception.
Most people don't consider turning on the TV to be a difficult hoop to jump through.
I am a HUGE media consumer, trendsetter, and generally on the bleeding edge of entertainment in my group of friends. I am their EXACT target, they just don't know how to market to me. I am the one telling my friends about new movies and tech, making sure they see what is good. I would without a doubt spend much MUCH more money then your average consumer if they made it available at reasonable speeds in a DRM-free format. (xVid, MP4, Mkv) I want to pay, and support the artists, and 'own' the material to move around on my own computers. The studios however won't let me unless I purchase physical content and do the rips myself. So most of the time I only up getting the blu-ray months down the road if it's something special. The only person who 'wins' in this situation is me, and I wish this weren't the case.
Maybe what they think of as "market rate" isn't justified by any fundamentals, and will continue to decline as people become more aware of the alternatives? Especially if people find illegal/free downloads via bittorrent to be more convenient than the legally available services.
I see Netflix having a problem on two fronts. The DVD side in having to deal with the USPS crisis and the streaming sides lack of good content while having to pay too much to fix it.
The postal service is itself trying to shut down Saturday delivery and night delivery. My dad is a postal worker. Him and most of his fellow coworkers do not have a problem with this change. They know the service is in trouble so they are willing to make compromises. This means that at least some of the changes are going to go through but they have to be authorized by Congress first. Right now the only reason why it hasn't happened yet is that some Congressmen are scared of how these changes are going to affect rural areas in their district. This change by nature is going to lessen the value of Netflix's DVD service. The question is by how much? You would have to order your movie by Wednesday or you're not going to have anything to watch over the weekend. Netflix really does not have any control over this.
The streaming sides problems are of course that everyone wants a chunk of the action. If Netflix wants to stream newer movies then they are going to have to pay up. Netflix streaming already has a wide assortment of movies but the most popular section of any video store is the new movie section. Its the same with Netflix as well. Hollywood learned the lessons of the music business vs Apple. They do not want to see that game played again. Apple has a stranglehold on the music world right now. Netflix is not going to be afforded the same luxury in doing the same with movies.
The crazy part is that, for me at least, $16 for unlimited streaming and one movie at a time is not a bad value. But it is the jarring way in how they raised the price which had me ready to quit the service all together. The $6 jump felt like a screw you.
the problem with Netflix is that over the past year they started offering less and less content on Instant Streaming(what most people tended to use). And the content they do have left is subpar at best. Sure there are a few good shows....but overwhelmingly anything popular is not available.
I don't know if I'd go that far, I still manage to find interesting things to watch on a regular basis. That said, I would happily pay 2 or 3x more if all of their dvd selection was available on instant (of course, I have no idea if that's feasible for them or if it would cost me more like 10x more for what the studios would charge)
Before my family cancelled netflix, my major problem wasn't that there was no content that I enjoyed, but that I had no way of finding that content. Their ratings system was really unreliable for me, so finding quality was difficult. On the other hand, when I heard about films by word of mouth, and found them on Netflix, I really ended up enjoying them.
I always found that Dish Network had a really reliable content rating system--it was an objective star system not based on user preferences. Some combination of this with tailoring to individual users might be the best fit for Netflix--it would help users find content, but it would also provide an objective measure that lets me validate the 'users like me' rating system the use now. If Netflix had a better algorithm/system for helping find content, and a dash of Hipmunk UI, then I'd still be a customer.
I agree with some of what you've written, but I have a few nitpicks from the interviews with their CEO that I've seen,
> Hollywood increasingly sees Netflix as a problem rather than an additional avenue for revenue. The studios may be concerned about creating another iTunes (virtual monopoly)
I think they see the NFLX subscriber numbers and are simply looking to get a bigger cut
>There's no offline viewing. IMHO Apple will increasingly address this market. Netflix needs to as well. When people are mobile they usually don't have a sufficient data connection, particularly if on a train or plane.
I don't believe that is how NFLX perceives itself. They seem to understand their market is a niche, and they don't see themselves as the place to go for the latest TV episodes, for example.
>Netflix seems to want to go the HBO route of creating original content.
I believe they see their ability to directly negotiate with studios (i.e. content creators) as a major source of leverage when dealing with the content owners moving forward.
Edit: Fixed horrible formatting. This was a response to cletus that got interrupted by a minor office fire drill :(
If it were up to Netflix they would give customers the content they want for the price that they want. Hollywood obviously wasn't going to let this slide and I fear streaming services will soon hike to cable-like prices.
Also, people paid for separate Netflix accounts because they each wanted their own accounts for DVDs. Now that Netflix upped their device count to a whopping 50 and split DVDs and Streams, I wouldn't be surprised if everyone went Stream only and shared their account with 10 other friends. That's certainly what I'm doing. As for DVD's? Well, piracy has become what's convenient, and I now have no ethical issues with it.
I think it's weird that wall street responds to customer numbers going down, rather than the announcement that their costs were going up by an order of magnitude.
"One analyst predicts that Netflix's streaming content licensing costs will rise from $180 million in 2010 to a whopping $1.98 billion in 2012." - Netflix needing to reprice to deal with that change is -why- people are quitting, and it's been a known problem for several months now, so why did the stock drop wait?
That's if subscribers keep the same level of service. Their subscriber count could stay relatively flat while everyone drops disc delivery service and their revenue wouldn't change by +60%.
This is the first wave, I am sure there will probably be more people next month who see their credit card statement and wonder why their bill is twice as much.
I think Netflix understands that the future is in streaming and not mailing out physical DVD's. Technology has advanced to a point where we can now watch movies in our flat screens with DVD like qualities from streaming. Mailing out DVD's are costly to the company. The change in price is designed to encourage streaming in my opinion. The more people sign up for the streaming service the more movies they can afford to upload for people to watch. In the long run I think this is a really good strategy. The price increase should have been a little lower though.
I can't help but think the content producers are overplaying their hand here. If they make legal streaming too expensive people who might not have bothered will start using bittorent instead.
The main problem Netflix is facing is not subscribers quitting because of a price hike but their seeming inability to make progress expanding their streaming catalogue.
Hollywood doesn't care about markets nor allowing demand to pick the products and services that are best for consumers. Let's get parity between movies and music by instituting compulsory licensing for movies and video media. Once MGM has "performed" or distributed their newest blockbuster, others are allowed to follow suit as long as they pay the licensin fee.
I looked at buying some, it's generally a good idea to buy a fundamentally solid company after an overreaction to a good-long-term/bad-short-term decision. I bought Starbucks right after they got hammered for closing a bunch of stores a few years ago and it did really well.
But their price/earnings ratio is still 42.86, which seems high. For perspective, Microsoft is at 9.99 (disclaimer: I own some) and Apple is at 15.56.
That means Netflix could double their earnings, and still cost more on a per earning basis than Apple. I just don't see it as a good buy, especially with some tough competitors in streaming content like Amazon, Apple, Hulu, etc.
It seems to me like there's lots of very solid buys that are undervalued, going for a sexy industry with a high P/E, no dividend, not much in the way of patents or strong assets, and tough competitors... yeah, I think Netflix is a brilliant company, but I'm not buying their stock at these prices.
As a consumer I know I am supposed to want lower prices, but I also wanter better selection. I'm probably never going to have both.
If I had to pick I'd pick higher prices and better selection. So my hope is that Netflix is sincere when they say they raised prices in part to get a bigger selection.
I quit Netflix streaming because I didn't want to pay more for a selection that has become smaller. I will rejoin if and when they bring a bigger selection.
PE is still 43+. Their subscription rate change only speeds up the inevitable realization of their stock being way over valued. Unless they have some plan that takes them to another level, their stock would have to come back down to earth sooner or later.
This kind of stuff happens pretty frequently to momentum stocks when they have what is perceived as bad news. Baidu is another stock with similar volatility sometimes caused by news.
this doesn't surprise me at all. It's a chain reaction. Prices increase along with subscription rules, subscribers leave, less revenue, less profits, the company is worth less.
I'm interested to see how Netflix is going to respond to this. I expect them offer new deals to try and recover users. I canceled my service three weeks ago
I hate price increases too but is there is any proof that Netflix is profit-gouging subscribers? Or are their suppliers jacking up the prices and Netflix has to pass it along somehow vs become the next Blockbuster?
The idea that people are quitting now because of theoretical price hikes in two years is... ludicrous. Remember that Netflix is month-to-month. People will leave when they no longer get value from it now.
Netflix movie selection doesn't seem to be great. In my case I subscribe to it for the TV shows more than anything else and for $8/month, the cost is easy to justify. YMMV.
I see Netflix's problem as this:
- Hollywood increasingly sees Netflix as a problem rather than an additional avenue for revenue. The studios may be concerned about creating another iTunes (virtual monopoly);
- Studios and distributors increasingly want to go on their own, which is really bad for consumers and seems to be driven by simple greed of cutting out the middleman without realizing what that middleman is actually doing for you;
- Netflix uses Amazon for scale. This is a problem. As much as burst architectures have theoretical advantages, the costs just don't add up beyond a certain size. I cannot believe that Netflix isn't at the point where they'd be better off owning their own servers;
- There's no offline viewing. IMHO Apple will increasingly address this market. Netflix needs to as well. When people are mobile they usually don't have a sufficient data connection, particularly if on a train or plane.
Netflix seems to want to go the HBO route of creating original content. This is an incredibly dangerous game to play with them forking out big bucks [1]. At least AMC's content in comparison is relatively cheap to produce and they have a relatively stable income due to cable bundling (although they're struggling with rising costs of Mad Men).
EDIT: Let me clarify. 2012 price hikes don't drive consumers. Current value and current price hikes drive consumer behaviour. The recent price hike in DVD+streaming will no doubt have caused some to drop the service. They could drop either streaming or DVD or possibly both.
I'm inclined to believe that DVD is an ever-smaller piece of their business but it may yet be significant to have a real impact on subscriber counts (in terms of subscriber loss).
Netflix uses Amazon for scale. This is a problem. As much as burst architectures have theoretical advantages, the costs just don't add up beyond a certain size. I cannot believe that Netflix isn't at the point where they'd be better off owning their own servers
I'm guessing that Netflix has probably spent a few minutes more than you analyzing their infrastructure costs. Sure they could have made a mistake and are being less efficient by using Amazon over their own data centers but I have a hard time believing that the mistake is as obvious as you seem to think.
I'm intimately familiar with the decision pattern that took place at Netflix, and what analysis they did, as I know some of their sr. operations staff.
The net-net is that Netflix could have saved 20-30% on their infrastructure costs by not going with Amazon, but then they would have to hire smart operations and infrastructure people. They wanted to focus on Software, and had no Operational leaders in their organization, so they walked away from that 20-30% infrastructure savings - likely because they realized that over time - infrastructure costs are not going to be particularly material to their overall cost of business - which will be dominated by the cost of the content.
That is a strange way to look at the decision. Clearly the costs of staff have to be included if you want to compare operating your own data centers to using Amazon. It is pretty easy to say that Amazon is more expensive by x% if you are willing to exclude certain costs from the alternative. What is the difference after adding in staffing costs?
Amazon really is that much more expensive. Even among "cloud" providers, they are expensive. Their competitive advantage is extreme flexibility with large amounts of servers (spin up a few hundred instances in a few hours, spin them down again a few hours later).
If you do it yourself, you don't just have to worry about money, but also how to hire good operations people, and what effect all those extra people are going to have on your organizational structure, internal culture, etc.
Do they not offer any kind of bargains for such a huge purchase/company ? I'd think Amazon would work with Netflix to offer at least somewhat competitive prices. I am just talking out of my backside here, but it seems to me like they probably are getting a better deal then the average joe running an EC2 instance.
OK, that's probably true. Even on the EC2 pricing page, if you go over 1PB/mo the price is "contact us" https://aws.amazon.com/ec2/pricing/ so I'm sure they're getting a better price than the "official" quote.
The price difference included the staffing costs - including onsite sysadmins, a NOC, network engineers, systems administrators, DBAs, Facilities Planners, Inventory Tracking Staff, Circuit Managers, Project Managers - fully loaded.
What I meant by "And then they would have to hire smart operations people" is that that is both (a) challenging, (b) fraught with risk, (c) not something anybody at Netflix with a sufficient seniority was interested in doing.
It wasn't that those staff cost a lot of money, though at the time, Netflix was paying a bit more for infrastructure staff, it's just that nobody was interested in building an operations empire. If they'd had a Chief Infrastructure Officer who had a passion for doing it, Netflix would have paid approximately 20% less for their infrastructure costs. But, at the end of the day, given they didn't have that CInfO, and 20% less on infrastructure wasn't that material to their business, they just outsourced it all to Amazon.
it's not a theoretical price hike in two years - Netflix just raised the prices on 9/1/2011. Prices have jumped significantly over the past two years. My costs have gone up over 50%!
Your local cable TV provider will be happy to slowly boil you into paying 50% more over the same time period with small increases in your monthly bill. Netflix could learn a thing or two from big cable about how to rip off customers without them even realizing it.
As per using amazon to scale, it depends on the services they use. EC2 is expensive, but you don't need that many ec2 instances to handle the streaming, outside of permission handling etc.
As for transcoding videos, they probably have a far more burst-like intake of movies, yet not a very large burst at that. How many tv shows are released per day? How many movies come out per day? Not too many, compared to a service like youtube that has to transcode huge amounts of information all the time. EC2 at least lets them turn on machines until they finish, at which point they can easily scale down after the burst is handled.
Netflix uses LimeLight, Level3, and Akamai for streaming, and you probably need a bigger footprint then you think for that. Building out a usable global streaming network is going to take more then a handful of EC2 instances.
For hosting, isn't bandwidth for movies delivery their biggest cost? I would imagine the servers and storage are relatively cheap. If they struck a low cost bandwidth deal with Amazon, hosting in AWS won't be too bad.
Netflix uses Amazon for scale. This is a problem. As much as burst architectures have theoretical advantages, the costs just don't add up beyond a certain size. I cannot believe that Netflix isn't at the point where they'd be better off owning their own servers
I would guess they believe the capitol to be gained through continued growth (or the capitol to be saved in a decline) eclipses the added cost of relying on Amazon.
In other words, owning your own servers is good for a stable market. They probably believe their market is still too volatile to depend on their own servers.
I have a feeling that this could just be a blip on the radar and Netflix's business is actually OK long-term, but I am one of the people who quit when they announced the price hike. Not because I didn't want to pay more, but because it was the last straw of me realizing I wasn't getting much value for my money in the first place. Their instant streaming service never had what I wanted to watch, and I'm no longer willing to deal with the two-day turnaround time for the DVDs. (I'm not proud of that last fact, BTW.)
> I'm no longer willing to deal with the two-day turnaround time for the DVDs. (I'm not proud of that last fact, BTW.)
I don't see why that's unreasonable -- they've had instant viewing for quite some time now, but the online collection has been woefully lacking for an equally long amount of time. It's very reasonable not to be satisfied with the 2 day turnaround time on good stuff, when thousands of B-movies are available instantly.
If they hadn't introduced all 7 seasons of TNG, I would have quit too.
Amazon Prime also has all seasons of TNG (and all the other ST series), costs less per year than Netflix, and includes free two-day shipping on all meatspace purchases. The Amazon Prime streaming collection is currently smaller than Netflix, but it's growing rapidly and from the perspective of a sci-fi fan it's almost as complete. If there are only a few shows you want that Amazon Prime lacks, it might actually be cheaper in the long run to buy those shows from Amazon, rather than pay netflix's higher price indefinitely.
I am in the process of cutting the cable, for which purpose I put together an htpc using xbmc on top of xubuntu to watch hulu, Amazon instant videos, and files ripped from my collection of DVDs. I was originally planning to supplement this with netflix on my Wii, but actually dropped the idea: most of my favorite sci-fi shows are free with Amazon Prime (which I already have anyway), and in the long run it's cheaper to buy seasons of my daughter's children's shows (Dora, Backyardigans, etc.) from Amazon rather than pay for Netflix indefinitely. Also, I can watch the Amazon shows on my htpc so I don't have to switch to the Wii to play one of my daughter's shows.
This is fascinating. I'll definitely keep an eye on Prime, especially given that I use Amazon for a significant percentage of my purchases.
We don't watch cable TV either. I've a big plasma TV in the living, with a PS3 and a PC attached to it. We do Netflix on the PS3 (streaming and discs), but so far the PC has only been used for games, some browsing, and the occasional Jon Stewart show.
But all that may change at some point. Thanks for the heads-up.
maybe it's because the content on Netflix is awful? i exclusively use streaming. i don't have any way to watch a DVD any more than i do a VHS tape.
i went back to piracy for movies a few months ago when i realized that there were actually good movies that came out in the 3 years I'd been relying on Netflix.
i still use Hulu for TV, but that will change if their content does.
As for the drop in subscriber numbers, it's understandable that people don't like price hikes, but losing less-profitable DVD customers may not be a bad thing in the long run. Postage and regional distribution centers are a drag on the company. Reducing those costs frees up funds for content distribution deals.