Putting the new rules to work

Archive for the ‘Movies’ Category

Netflix customers received an email this morning from Reed Hastings, co-founder and CEO of Netflix. In it, he eats a fair helping of humble pie, acknowledging that ”many members felt we lacked respect and humility in the way we announced the separation of DVD and streaming and the price changes.”

That’s the second thing he did right. The first came months earlier, when he recognized that streaming video was a different business than mail-order DVDs. Having the two services under the same name, at the same web site, was confusing. As a customer of both, I found myself occasionally putting a movie in my DVD queue when I actually meant to place it in my queue for instant viewing. So they’re doing something else that’s probably a good idea — changing the name of the DVD service to Qwikster and separating it from the Netflix streaming web site.

What Netflix did wrong was to simply announce what amounted what amounted to a 60% price hike. I and a million other customers dropped the DVD service immediately. For most folks, it wasn’t about the money. Rather, it was about the feeling that something had been taken away.

Once we have a service, we tend to quit worrying about the price, as long as price changes are incremental enough to prevent outrage. That’s why the cable and telephone companies can get away with teaser rates that go up after a few months. Once it’s in, we quit analyzing it.  If we did the math on all the services we get at any given time, we’d usually find that better deals are available on some of them. But most of us have other things to worry about. So we go with the flow, as long as nobody calls attention to it.

But calling attention to it is just what Netflix did. The increase for the two services combined was stiff enough to force people to do the math. In my case, I realized that I only actually watch one or two DVDs a month. I can rent streaming movies for $2 to $5. Plus, I was miffed at Netflix’s arrogance in announcing the change. A few clicks on their web site and I was done with the DVD mail service.

If they’d phased in the change — perhaps $4 now and another $4 in a few months — they probably could have avoided the mess.

But they may be making a bigger mistake than that. So far, there’s no sign that Netflix intends to be in the pay-per-view side of the streaming market, and it may be too late. That would, of course, deviate from Netflix’s history of flat rate service, and that may be why they’re avoiding it. Only time will tell.

I’ve known for a decade that physical storage (paper and plastic) would eventually die as a delivery mechanism for movies and music. I just didn’t know when. Now it’s becoming clear to anybody who connects the dots that judgement day is here.

Three events within the last month dramatize this reality:

• Netflix raised prices 60% overnight.  It’s hard to believe, but Netflix didn’t start streaming video until 1997, when it was already 10 years old. When streaming began, it was clearly an add-on, but that is changing quickly. Now people are bailing on the mail-based service and keeping the streaming service, even though the streaming service has far less content available.
• Spotify hit the United States with flat-rate music streaming. Everybody seems to have a “cloud-based” music streaming service these days. Amazon has one. Google has one. Apple has one. But the one that seems to have made the biggest splash so far is Spotify. I’m using Spotify now and love it, but it’s too early to pick the ultimate winner.
• Borders went into bankruptcy. I love books, and for some reason I’ve bought more physical paper books in the last month than I have in the last year. And I think we’ll always have physical books, but I’m not sure why.

Why are we seeing these shifts? Because movies, music and books are all information, and information doesn’t have to have a physical medium.

I think we’re arriving at the same place where the phone business was in the 1980s and 1990s. When I worked with BellSouth (which is now part of AT&T) beginning in 1984, we understood the non-physical nature of information more quickly than most, because we’d been transmitting our information (voice telephone calls) for decades without local storage. You didn’t download your conversation. You didn’t store it on your phone. You certainly didn’t go to the store and buy it on record, CD or tape. You had your conversation. You paid the phone company (flat rate for local service and toll for long distance), and you were done.

Music, movies and book content are no different from telephone conversations, except that they all include content that we have historically wanted to keep and call our own. This is why we all have books rotting in the attic, LPs warping in the closet, and VHS tapes we can’t even play any more. We like to think we own them, even if we can no longer have much use for them.

We came to this point in stages. With iTunes, Apple brilliantly showed us that we didn’t need a CD. We could simply download our music and store it on our iPods. If we insisted on having CDs, we could burn our own. We were halfway there, but we were still using physical storage. iPods are, after all, little hard drives (or more recently, flash storage units).

The Kindle brought the iTunes model to books, magazines and newspapers. We buy the information and download it to our device. But we still store it locally, on our Kindles, Androids, iPads and iPhones.

Video took a slightly different path. Blockbuster got us accustomed to the notion that we didn’t have to have our own copies, though we all still got DVDs for Christmas. Netflix’s mail order service transformed that to a flat rate, but we still used disks that had to be manufactured and transported.

Then streaming began to take hold with Netflix’s streaming product, which was an add-on to the mail service. You could get both for $10 a month. Since they’ve unbundled the disk and streaming services, it’s now $8 a month for streaming and $8 a month to get disks in the mail. The interesting part of this is that people are dropping the disk service and keeping the streaming. I believe this is what Netflix intended all along. They understand that physical storage is dying, and they want to start getting out of the business of buying, storing and mailing physical disks.

Finally, Spotify is doing for music what Netflix streaming and Hulu have done for video: Transformed it into a streaming-only service and eliminated the hardware. This is why it renders the “buy, store and keep” business model of iTunes obsolete.

In all cases, streaming is a clear winner, because information isn’t physical. It’s going to take some time for some of us — especially those who grew up on records — to get our arms around this.  But it’s a reality.