The newsonomics of Netflix and the digital shift - Ken Doctor

Ken Doctor via

The print world ends not with a bang, but with price increase after price increase.

These economics of transition have a second, big piece for publishers that Netflix doesn’t have to worry about: advertising. With advertising accounting for 70 percent of newspaper revenues worldwide, the huge question for publishers is how much ad revenue they can make from purely digital customers. In the U.S, newspaper publishers know they make more than $500 a year on a Sunday print subscriber. With reduced digital product cost (like Netflix’s reduced cost of streaming), newspaper and magazine publishers won’t need the same level of revenue, but they will need a substantial part of what they are getting today. Those economics are just being modeled now in 2011, as the promise of higher-priced and higher-value tablet (and smartphone) advertising looks like it may be real and buildable.

Magazine and newspapers aren’t yet ready to more forcibly shift the audience in the direction of digital-only.

Timing is a big question here. Reed Hastings is flipping the Netflix switch more heavily toward digital, even though fewer than half his revenues are yet there. For newspaper publishers, with no more than 20 percent of their overall revenues in digital, the time may be one to three years away.

When publishers flip that switch — pushing customers more heavily toward digital — they want the force to be with them, not against them. The news and feature businesses are different than Netflix’s. Yet the strategies involved — make the old business a division, model out the new business model, move to it as quickly as you can once you’ve got it figured out — all apply. In mid-2011, Netflix is a canary in a (circulation) coalmine, with lessons to be learned.

I bet the future is unequally distributed (as Gibson said), and we will see some — like the Guardian — adopting the Netflix one-two punch pretty quickly.

Netflix Introduces New Plans and Announces Price Changes

Leaving aside the new plans (which are window dressing), Netflix has announced that they are breaking the streaming and DVD services apart:

[…] we are separating unlimited DVDs by mail and unlimited streaming into separate plans to better reflect the costs of each and to give our members a choice: a streaming only plan, a DVD only plan or the option to subscribe to both. With this change, we will no longer offer a plan that includes both unlimited streaming and DVDs by mail.

So for instance, our current $9.99 a month membership for unlimited streaming and unlimited DVDs will be split into 2 distinct plans:

Plan 1: Unlimited Streaming (no DVDs) for $7.99 a month
Plan 2: Unlimited DVDs, 1 out at-a-time (no streaming), for $7.99 a month.

The price for getting both of these plans will be $15.98 a month ($7.99 + $7.99). For new members, these changes are effective immediately; for existing members, the new pricing will start for charges on or after September 1, 2011.

Basically a doubling of price, which will simply accelerate the transition to streaming only, which is probably fine with Netflix.

It doesn’t look like Netflix is just trying to make more money here. They are offering unlimited streaming for $7.99/mo for the first time, and a plan with unlimited DVDs (one at a time) for $7.99. So they are making considerably more money in the lower tiers of the new plan. So the threshold for getting started is higher, but when you get out to the 5 DVDs at a time and unlimited streaming it’s only $2/mo more.

In my case, I opted to downgrade: a 1 DVD at a time plan and an unlimited streaming plan. So I will pay around $15/mo, instead of the $36/mo I might have paid for unlimited streaming and 5 DVDs out at a time, but which was $34.99/mo until this month.

Since the plans changed, I realized that I had let my DVD queue go empty several times in the past months, so I just don’t need as many DVDs as I originally did. Just one at a time for the occasional movie that is not stream-configured yet.

So I think Netflix will lose some money from people like me defecting from discs, and gain some from people signing up for unlimited streaming with a disk or two at a time.

But both the DVD-only and streaming only businesses can make money at the lower tiers, which must have been a loss leader for one or both services, before.

And by breaking out the team managing the DVDs, Netflix might be preparing to spin it out:

Jessie Becker via Netflix blog

Last November when we launched our $7.99 unlimited streaming plan, DVDs by mail was treated as a $2 add on to our unlimited streaming plan. At the time, we didn’t anticipate offering DVD only plans. Since then we have realized that there is still a very large continuing demand for DVDs both from our existing members as well as non-members. Given the long life we think DVDs by mail will have, treating DVDs as a $2 add on to our unlimited streaming plan neither makes great financial sense nor satisfies people who just want DVDs. Creating an unlimited DVDs by mail plan (no streaming) at our lowest price ever, $7.99, does make sense and will ensure a long life for our DVDs by mail offering. Reflecting our confidence that DVDs by mail is a long-term business for us, we are also establishing a separate and distinct management team solely focused on DVDs by mail, led by Andy Rendich, our Chief Service and Operations Officer and an 11 year veteran of Netflix.

And the future CEO of DVDFlix?

TDG: Proclivity to Downgrade PayTV Services Increasing among Netflix Streamers

According to The Diffusion Group’s (TDG’s) latest analysis of Netflix Streamers—those that stream Netflix content to their net-connected devices—the inclination to downgrade PayTV services has doubled in just the last 12 months.

In March 2011, TDG queried a random sample of adult broadband users that subscribe to cable, satellite, or telcoTV service as to the likelihood they would downgrade their PayTV service in the next six months—that is, “…move from a higher service tier to a lower one, or cancel a premium service of some kind.” In general, the percentage of Netflix Streamers to varying degrees likely to downgrade their PayTV service increased from 16% in 2010 to 32% in 2011.

Though Netflix has gone to great lengths to reassure PayTV operators that its offerings are additive to regular TV viewing and thus not a competitive threat, research now suggests that the ‘Netflix Effect’—that is, growing use of Netflix will lead to PayTV service downgrades and even cancellation—is gaining momentum.

D’uh.

Hollywood in turmoil as DVD sales drop and downloads steal the show -- Dan Sabbagh

The sale of DVDs has been falling since 2007, but the Digital Entertainment Group (DEG) reported that physical sales collapsed 19% to $2.2bn (£1.3bn) in the first quarter, while high-street rental also plunged by 36% to $440m, in a period when Blockbuster was in Chapter 11 bankruptcy protection. Online downloads and streaming through services such as Netflix, by contrast, grew quickly, although not enough to avert a 10% decline in the total home entertainment market to $4.2bn.

Ephemeralization of movies will lead to huge swaths of the entertainment marketplace collapsing, like Blockbuster. Redbox and its competitors have a way to go, but they are strictly transitional, too.

Just as big will be the death of DVD/Blu Ray players, as streaming becomes the principal distribution, and then TVs, as more and more of streamed movies and entertainment is watched on mobile devices and PCs.

Sell everything, like Sony, Panasonic, and all the others. They are walking dead.

Netflix testing $7.99 and $8.99 streaming-only plans in US right now, one is not a discount (update) -- Engadget

I logged into my account, and there is no way to switch to streaming only at this point. But I did step down to only 2 DVDs out at a time. Last I checked you had to get at least 4 DVDs to get streaming at all.