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I’m a huge fan of NetFlix. Really. It completely changed the game for the home rental business, and for the next generation it’s a killer app. In fact, my 3 year old recognizes the logo from across the room as her “go to” source for kids content. But unless something big changes at that firm it has officially lost its way and will lose market share quickly to other services.

At the outset Netflix had a clear value proposition to the consumer. A clean online interface, huge library of great DVD titles, easy to use system for receiving the DVD product and reasonable price point. Adding Blu-ray only deepened this value proposition as a replacement for a retail model that could be made better.

Then came online streaming as part of the service. Upon launch this seemed like an awesome new feature, adding a pretty good library of content thanks to Starz content library rights (for cable veterans we remember how big of a bet John Sie made to get those rights 10 years ago). It all made sense. Take my preferences from DVD selections and apply them to a larger online library for added benefit. This all sets up nicely for churn reduction and a gradual increase in pricing or upselling to purchase.

The problem now is the content available for streaming pretty much sucks, and with no “rent the good stuff” model like Amazon often you’re left having to turn to another service (unless you just can’t get enough of Jason Statham). So now of course Amazon is catching up.

Physical media on DVD is still governed by the standard studio windowing rules so that’s still ok. But given the current pricing model that’s an incremental cost which makes it a new purchase decision. The bottom line is that consumers have to get a marginal online streaming service plus pay extra for DVDs to get the best bundle of services. I know Netflix claims it’s not being hurt given metrics like total streaming per user, but this doesn’t take into account the type of content being viewed and its perceived value to the viewer.

If the game stays the same Netflix will need to pay for big ticket content deals and exclusive content, and invest to deliver innovation to keep customers happy. I’d love to see them add a rental service on top of the base streaming package, to compete with “on-demand” services like iTunes and Amazon. Otherwise perhaps it’s time to sell now to someone who can make this their lead direct to consumer strategy. Either way staying the course doesn’t seem like an option. For my 3 year old’s sake, I hope they figure it out.

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