Netflix and new releases

Netflix has never been much of a new release company. Even before it launched its streaming service, when it was just a DVD rental operation, new releases made up a smaller percentage of its business than for other video retailers. Today its streaming catalog includes almost no new releases.
Netflix officials say they have no plans to shift that mix, either. Asked during the company’s fourth-quarter earnings call on Wednesday why Netflix doesn’t add a pay-per-view option for its streaming service that would allow it to offer movies during their new release window, CEO Reed Hastings was about as categorical as a chief executive gets in dismissing the idea.
“We believe that unlimited for a low price — in the U.S. $7.99 a month — is the core of our brand proposition and that if we were to add pay-per-view it would be a negative, it would confuse the brand,” Hastings said. “We are not at all, nor have we ever been interested in pay-per-view.”
Never say never, though. Netflix may offer consumers an attractive value proposition today, but value propositions are always relative. They rise and fall based on other options available in the marketplace. Here are three factors that, over time, could impact the perceived value of what Netflix offers and eventually force it to shift strategies.
In his comments on the earnings call, Hastings went on to note that the online pay-per-view business is already crowded. Wal-Mart (Vudu), Amazon, Apple, Best Buy (CinemaNow) and Blockbuster all compete to offer à la carte rentals of new release movies, leaving little room for Netflix. As Wells and Hastings themselves noted in Netflix’s Q4 letter to shareholders, “We expect Amazon to continue to offer their video service as a free extra with Prime domestically but also to brand their video subscription offering as a standalone service at a price less than ours.”
Wal-Mart is also a strong candidate to eventually introduce an all-you-can-eat subscription service through Vudu. Right now, Wal-Mart is only in the early phases of integrating Vudu with its broader e-commerce strategy. But it is sure to figure out at some point that a subscription streaming service will increase total Vudu usage, keep users logged into and encourage them to give valuable data on their viewing habits, and provide a marketing and merchandising platform for everything else Wal-Mart sells.
As other providers shoulder their way into Netflix’s niche, their broader offerings could begin to tell on Netflix’s share of total online viewing and of its users’ wallets. Netflix would then have little choice but to broaden its own offerings to compete.
Release windows
Right now, Netflix’s all-you-can-eat catalog offer is attractive in part because most of the pay-per-view and electronic sell-through options for consumers are so unattractive. Prices are too high and the time window between theatrical release and in-home availability is too long.
Theatrical audiences are shrinking rapidly, however (perhaps permanently), and the long window before in-home availability only invites piracy. At some point, probably soon, the studios will have no choice but to make movies available at home sooner and cheaper than they do now in order to capture revenue that is lost to piracy and to make up for falling ticket sales. As that happens, consumer home-entertainment spending will shift forward in the sequence of release windows, hurting those at the tail end of the sequence such as Netflix. To stay relevant, Netflix may find it has to have a presence in the earlier window by offering à la carte rentals.
The cloud
Netflix has been successful at embedding its streaming app on a wide variety of connected devices, both fixed and mobile. But as cloud-based services begin to enable content to be synced among devices, Netflix’s presence on those devices will lose some of its competitive value. At the same time, the cloud adds little value to Netflix’s subscription rental model.
To take advantage of the cloud — and to keep pace with consumer adoption of cloud-based platforms — Netflix may eventually find it needs to offer more cloud-friendly services, like à la carte rentals and electronic sell-through, as Amazon has done in launching the integrated Kindle Fire platform.
Netflix has been successful over the years at taking advantage of the weaknesses of competing services. It conquered Blockbuster by eliminating annoying late fees and the driving back and forth to the video store. Its streaming service has thrived where online pay-per-view has struggled by exploiting consumers’ perception that digital downloads were overpriced. As the competition evolves, however, Netflix will face pressure to evolve with it.

Question of the week

Should Netflix offer à la carte rentals, and if so when?