Netflix subscribers are reaching for the tar and feathers over the company’s decision to split the business in two: a streaming model and now a separate DVD-by-mail service.
But furious customers ought to know: the man with the red envelope had no choice.
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The price hike and corporate splintering wasn’t a case of greed-- it was a hard-headed business decision, however clumsily executed.
If Netflix continued offering an all-in-one package of streaming and DVD at a steep discount, it would be joining Hollywood Video in the home entertainment graveyard.
Netflix was bleeding money because of higher content and postage and costs, studio executives and analysts tell TheWrap. The company was shelling out as much as $1.50 in fees to the studios each time it mailed out a disc.
That figure doesn’t even account for the money the company was spending to mail its films to customers; a cost that will likely rise while the postal service continues to hike up shipping costs as Americans grow ever more comfortable with online shopping.
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For the former all-inclusive price of as low as $9.99 per month, that could quickly turn into a losing proposition.
While streaming licenses used to be a relative bargain for Netflix , those days are gone as content providers extract what they see as their rightful share of the digital pie. Whereas a deal to stream films from Disney and Sony via Starz had formerly carried a tolerable $30-million-a- year price tag, the cable company just walked away from a pact some pegged as worth $300 million annually.
For the privilege of carrying movies from Lionsgate and Paramount, Netflix pays out $200 million a year to the cable channel Epix, and that doesn’t even take into account the service's recent move into original programming – beating out HBO and Showtime for a costly little curio called "Game of Cards," that sports the combined and expensive pedigree of Kevin Spacey and David Fincher.
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Though streaming is no longer cheap, it is clearly where the future lies. To enforce the logic it now must pursue—building the subscriber base online and slowly choking off the mail model—Netflix’s painful and much-loathed decision was probably necessary.
There’s another upside. By spinning off the DVD-only subscribers from the streaming users, Netflix is cutting down on the amount of money it shells out for digital content. The fees it pays to stream movies are calculated on a per-subscriber basis, much as they are for pay-TV companies, so treating the groups separately will drive down costs.
Wall Street has been brutal in its assessment of the manner of move: Michael Pachter, an analyst with Wedbush Securities, told The Wrap, “it’s the dumbest thing I’ve ever seen.”
