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| DVD Library Is An Asset For More Than Accounting
In July 2011, Netflix (NFLX) announced that it would charge separately for
its DVD and streaming offerings, raising prices for some customers as much as
60%. Its shares plunged from a high of $304.79 set in July 2011, to $155.19 on
Friday September 16. That weekend it announced that it was splitting its DVD
business into a separate company called "Qwikster" and the Netflix share price
plunged further, ending at a low of $62.37 on Nov 30, 2011, even after customer
outrage had prompted the reversal of the Qwikster decision in October. Netflix
accounts for its DVD content library as a noncurrent asset on its balance sheet,
amortizing the DVD cost over 1 to 3 years. However, its new pricing structure,
which it retains to date despite the reversal of its illfated Qwikster decision
shows the designer iphone 5s cases company is treating the DVD part of the business like an unwanted stepchild rather than a competitive asset for customer retention
against challengers like Hulu, Amazon (NASDAQ:AMZN) and other potential
streamingonly entrants.
In the original blog post Qwikster, Netflix CEO Reed Hastings explained his
position as follows:
The benefits of our streaming service are really quite different from the
benefits of DVD by mail. We feel we need to focus on rapid improvement as
streaming technology and the market evolve, without having to maintain
compatibility with our DVD by mail service.
So we realized that streaming and DVD by mail are becoming two quite
different businesses, with very different cost structures, different benefits
that need to be marketed differently, and we need to let each grow and operate
independently.
In all of his moves, Hastings has missed a key point. From a technology or a
cost structure point of view the streaming and the DVD offerings may well be
different businesses but from the customer point of view they positioned Netflix
as a onestop shop for movie buffs, some could be watched instantly but if not
available on instant, could be obtained as a conveniently mailed DVD for one low
price. Rather than expanding its offerings toward a onestop entertainment
company, Netflix lost its customers over Adidas iPhone 5S Cases format and delivery. It also created one of the strangest pricing strategies. While every other company looks to upsell and
crosssell its offerings, Netflix's current pricing structure offers no incentive
for its streaming customers to be DVD customers or vice versa. As a result,
Netflix is actually losing revenue.
As one sample customer, I started with Netflix's 2 DVDs at a time plan, and
as its streaming offerings increased had dropped down to its $9.99 unlimited
streaming+1 DVD plan. Based on how busy I was, often I would end up not watching
the DVD I had out for a couple of months, but it was nice to know that I had the
option of putting DVDs on my queue that were not available on streaming.
When the price for unlimited streaming + 1 DVD suddenly became $15.99, paying
the extra money per month for the DVD service I only used once in a while made
little sense. So I dropped my plan to the $7.99 streaming only plan. Netflix
ended up losing $2/month in revenue and at the same time has a less satisfied
customer. I have become increasingly unhappy with the relatively limited content
offering of Netflix streaming (I watch mostly movies, not TV shows) in
comparison to the much wider selection available on DVD. Though, at the end of
the day, Netflix prices are still a tremendous value, it did not make sense for
me to pay $7.99 a month for a DVD service I used no more than once or twice a
month. cheap iphone 5 cases
Netflix does have a $4.99 1 DVD a month plan limited to two rentals a month
but it comes with limited streaming, further narrowing my iphone 5s cases entertainment options. I cannot add this $4.99 DVD plan to my $7.99 plan for a total of $12.98 a month for unlimited streaming and two rentals
a month. It is as if the company is trying hard not to get my money! Since there
is no benefit from getting both streaming and DVDs from Netflix, and it is, in
fact, impossible to get the package I want, I am expanding my options and
looking at other competitors for both streaming and DVDs. Netflix has turned a
stable and loyal customer into a dissatisfied one. A smart bundling strategy
would instead preempt competition.
Netflix's DVD content library can be a tremendous asset to present a more
comprehensive selection to customers than streamingonly services from Amazon,
Hulu and potential competitors like Comcast (NASDAQ:CMCSA) and others. For this,
Hastings and Netflix have to wear customercolored glasses. Yes, over time DVDs
will be obsolete. But in the battle for customer retention and loyalty is to be
won and lost today.
In the blog post announcing Qwikster, Hastings wrote:
This may well become a case study for a company dying from moving too fast,
or perhaps just too stupidly by letting its own fear and concepts on what a
company must do to "make the leap" overpower listening hard to what customers
want from the company. People want to feel they have choices even if they don't
always exercise them. DVD rentals as a lowpriced addon to the streaming
offerings will make its DVD content library into an asset for customer retention
by creating a much larger content offering than its streamingonly competitors
even as DVD usage will decline. There is still time for Netflix to fix its
pricing with creative bundling options using its DVD library asset to make its
customers happy paying more.
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