Streaming and Netflix's Woes

A few years ago, when I was still contemplating the purchase of a Blu-Ray player (which ended up being the PS3), there was a lot of huffing-and-puffing about how Blu-Ray would never catch on, physical media was dead, and that streaming was the future. My thoughts on that at the time were that streaming is indeed the future, but that it would take at least 10 years before it actually happened in an ideal form. The more I see, the more I'm convinced that I actually underestimated the time it would take to get a genuinely great streaming service running.

One of the leading examples of a streaming service is Netflix's Watch Instantly service. As a long time Netflix member, I can say that it is indeed awesome, especially now that I can easily stream it to my television. However, there is one major flaw to their streaming service: the selection. Now, they have somewhere on the order of 20,000-30,000 titles available, which is certainly a huge selection... but it's about 1/5th of what they have available on physical media. For some folks, I'm sure that's enough, but for movie nerds like myself, I'm going to want to keep the physical option on my plan...

The reason Netflix's selection is limited is the same reason I don't think we'll see an ideal streaming service anytime soon. The problems are not technological. It all comes down to intellectual property. Studios and distributors own the rights, and they often don't want to allow streaming, especially for new releases. Indeed, several studios won't even allow Netflix to rent physical media for the first month of release. In order for a streaming service to actually supplant physical media, it will have to feature a comprehensive selection. Netflix does have a vested interest in making that happen (the infrastructure needed for physical media rentals via mail is massive and costly, while streaming is, at least, more streamlined from a logistical point of view), but I don't see this happening anytime soon.

Netflix has recently encountered some issues along these lines, and as a result, they've changed their pricing structure. It used to be that you could buy a plan that would allow you to rent 1, 2, 3, or 4 DVDs or BDs at a time. If you belonged to one of those plans, you also got free, unlimited streaming. Within the past year or so, they added another option for folks who only wanted streaming. And just a few weeks ago, they made streaming an altogether separate service. Instead of buying the physical media plan of your choice and getting streaming "for free", you now also need to pay for streaming. I believe their most popular plan used to be 1 disc with unlimited streaming, which was $9.99. This plan is now $16.98.

As you might expect, this has resulted in a massive online shitstorm of infantile rage and fury. Their blog post announcing the change currently has 12,000+ comments from indignant users. There are even more comments on their Facebook page (somewhere on the order of 80,000 comments there), and of course, other social media sites like Twitter were filled with indignant posts on the subject.

So why did Netflix risk the ire of their customers? They've even acknowledged that they were expecting some outrage at the change. My guess is that the bill's about to come due, and Netflix didn't really have a choice in the matter.

Indeed, a few weeks ago, Netflix had to temporarily stop streaming all of its Sony movies (which are distributed through Starz). It turns out that there's a contractual limit on the number of subscribers that Sony will allow, so now Netflix needs to renegotiate with Sony/Starz. The current cost to license Sony/Starz content for streaming is around $30 million annually. Details aren't really public (and it's probably not finalized yet), but it's estimated that the new contract will cost Netflix somewhere on the order of $200-$350 million a year. And that's just Sony/Starz. I imagine other studios will now be chomping at the bit. And of course, all these studios will continually up their rates as Netflix tries to expand their streaming selection.

So I think that all of the invective being thrown Netflix's way is mostly unwarranted (or, rather, misplaced). All that rage should really be directed at the studios who are trying to squeeze every penny out of their IP. At least Netflix seems to be doing business in an honest and open way here, and yet everyone's bitching about it. Other companies would do something sneaky. For instance, movie theaters (which also get a raw deal from studios) seem to be raising ticket prices by a quarter every few months. Any given increase is met with a bit of a meh, but consolidated over the past few years, ticket prices have risen considerably.

Ultimately, it's quite possible that Netflix will take a big hit on this in the next few years. Internet nerd-rage notwithstanding, I'm doubting that their customer base will drop, but if their cost of doing business goes up the way it seems, I can see their profits dropping considerably. But if that happens, it won't be Netflix that we should blame, it will be the studios... I don't want to completely demonize the studios here - they do create and own the content, and are entitled to be compensated for that. However, I don't think anyone believes they're being fair about this. They've been trying to slow Netflix down for years, after all. Quite frankly, Netflix has been much more customer friendly than the studios.