Netflix's Price Spike Not So Perilous...Yet

When Netflix's e-mail announcing a $5 per month increase arrived in my inbox yesterday I was upset -- for about a minute. In one sense this first big price jump is much ado about nothing. But in the long run, as Netflix's price advantage continues to narrow, it may begin to look like just another cable television provider.

Everyone likes to get something for nothing. Netflix gave users access to quite a bit of content for next to nothing when compared to the typical monthly cable television bill.

Prior to canceling Comcast I was paying upwards of $70 a month, including all of those fees and service charges, for the second lowest tier of television service it offered (the average monthly cable TV bill is well over $70, with an average increase of 5% a year; the average Comcast customer's cable TV bill comes to $129.75 per month). Since cutting the cable I've pared that to $14.99, which gets me unlimited 2-out at a time DVDs plus streaming and saves about $55 a month.

The problem of course, is that many people didn't cut the cable when they picked up Netflix. They wanted those local, real-time news programs, sports channels and the latest television shows from the networks. For these customers Netflix, at its new price point, now costs about as much as adding one premium channel to the monthly cable TV bill.

Pundits say the price increase gives competitors an opening. I don't think so.

The idea of Redbox as a replacement for Netflix is an nonstarter. Redbox has far too small of a selection to make it anything but a supplemental service. And from my experience it has quite a bit of difficulty keeping its discs in readable form -- a frustrating experience that occurs frequently with the Redbox you see in the air lock at your local Walmart - and one that seldom occurs with the Netflix discs I've received by mail.

Hulu is for desktops. For big screens, Hulu Plus is just too limited in its content for the price. We tried it and cancelled. It has a few gems, but much the television programs it offers are either old, obscure or both. Amazon has an all-you-can-watch instant video program that comes only with its $80-a-year Amazon Prime subscription but the service is likewise lacking in the selection department -- about 5,000 titles versus 20,000 for Netflix -- and the rest of its 90,000 movies stream for up to $4 a pop, about what it costs to rent at the local video store.

So while in relative terms a 33% increase in my Netflix subscription seems like a lot, in hard dollars that's still chump change in the entertainment content delivery market -- at least from where I stand.

The real problem is that Netflix is following the same all-you-can-eat cornucopia of content business model as the cable companies, and like the cable companies it's feeling the heat from content providers, who want a bigger share of the pie. Now that Netflix is established, they will start negotiating ever higher fees for their content.

Content providers force cable companies to take blocks of channels of questionable value in order to get the channels viewers want. Users end up with a mess of unwanted channels they must wade through, using the horribly outdated television channel numbering system user interface, to find the few nuggets offered by the service. And premium channels require basic cable, making HBO, for example, very expensive if that's all you want to watch.

But what if you could unbundle the content streams and buy all-you-can-eat streams of just the channels you wanted? Only new movies. Or HBO. Or Classics. Or NBC. Or let users buy all television comedies, dramas or news programs across all categories? Let the consumer decide. Now that's disruptive. Unbundling breaks the business model, the cable companies have fought tooth and nail to avoid it, and its not in the Netflix business plan either, so far as I can tell.

Netflix needs to continue to innovate in its business model. Barring that it will end up as just another cable company, if a virtual one, with expensive, bloated blocks of content offerings weighed down with a lot of fluff that customers don't want.

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