Netflix is Making Me Choose?

Netflix (Nasdaq: NFLX) is a rockstar stock tripling value from levels just one year ago, but last week the decision to split their online video streaming from their mailed disk offering has some customers fuming and business analysts scratching their heads. At first blush I can understand why, as a customer myself I’m looking at a 60% rate hike on what I’m paying now, but upon further review I see it as a seminal moment in the evolution of media.

Living in Brooklyn my household was a late adopter of Netflix. Within a single block of my brownstone I had a full spectrum of rental entertainment. There was Blockbuster up the street (full disclosure I always wore a disguise upon entering the premisses) for all my mainstream new release needs, and Video Free Brooklyn around the corner for the titles that I was more apt to cop to watching. I didn’t see the value to waiting for Mary, my letter carrier, to stuff my movies through the mail slot.

To this day those red envelopes will sit on top of the DVD player for weeks before they are ever played, and we still visit Video Free Brooklyn all the time. In contrast, we have embraced streaming movie and TV shows from Netflix. At my house we have no less than 6 devices that can display the streaming content. Splitting the offering only means Netflix is effectually  lowering our monthly subscription fee because we’ve dropped the disk delivery service like a I dropped Accounting II in college — FAST.

Research firm TDG says, “70% of Netflix dual-subscribers – those that use both DVD-by-mail and streaming video – are disappointed with Netflix’s new pricing scheme.” And they expect the company to lose two million to 2.5 million subscribers as a result. I’m not buying it. I think they will lose much fewer customers, all of which will be replaced in a couple month’s of growth any how. On top of that, I believe that if customers do make a change in their service it will be just what I did, which is to lose the DVDs and stick with the streaming.

This all bodes well for Netflix. Their disk business has plateaued while their streaming service is exploding, and the margins on the digital side are many times larger than the disk side. They are aggressively  inviting their customers to join them in ushering in the future of media. Let’s face it, DVDs are yesterday’s Betamax. Disk delivery of media is not long for the world. Netflix understands this and is doing something proactive about it. You can expect their streaming offering to get better and better. In fact, in a letter to shareholders, the company highlighted multi-million dollar licensing deals with Miramax, Revolution Studios, Viacom and NBC Universal. It also said customers could soon expect exclusive “Mad Men” episodes. Don’t hold your breath expecting to see Don Draper exclusives delivered via a disk.

My next question is, why do I need to go to a movie theater to see first run movies? I’d be happy to pay a $12 premium to stream at home, and I would certainly see more of them rather than waiting to spend $2.99 for a rental. There is a lesson in there for the newspaper industry.