Early last week, my wife and I realized that the same three DVDs from Netflix had been sitting in a pile for the last four months. This was not the first time it had happened, but I finally decided to act. I downgraded our plan to one DVD per month with unlimited streaming. Before the change to my account even took effect, Netflix announced their pricing change, so I just cancelled the DVD option entirely.
The tech blogs jumped all over the Netflix pricing change. Business Insider even ran a quick pollwhich showed that 41% of people would cancel their Netflix accounts entirely, while 35% would take the same streaming-only option that I did. I highly doubt that 41% will quit, but I do believe that a significant portion of customers will opt for streaming-only. Netflix customers realize that having instant streaming available at any time is just too convenient.
The tone of this media coverage is all the same -- Netflix has made a mistake and they are certain to lose market share to competitors. It is quite similar to the coverage earlier this year when the New York Times announced their paywall. I was attending a product development conference in March where the subject of the Times paywall came up repeatedly. Everyone was extremely critical about this move and was quite sure it would fail. One brave person spoke up and said that he thought we were underestimating the Times. He said that they had done years of research and reminded us that the Times was an early adopter of the internet and has been much more successful there than any of their competitors. I've always held the Times in high regard, so I was even more inclined to agree with this lone dissenter.
The media coverage in the first few months after their paywall announcement focused on the same short term effects -- losing customers and market share. But both the Times and Netflix have a history of thinking long in their overall strategy. The Times only required a very small amount of subscribers this year to break even for lost advertising revenue. The number thrown around was approximately 100,000 and they surpassed that within the first few months. There were also articles criticizing how easy it was to circumvent the paywall. Linking from search results and social sites don't count towards your 20 article per month limit, so people could seek out links to articles rather than visit directly. They could also use multiple browsers or just delete their cookies. I feel confident that the Times could figure out how to plug these holes, but they clearly don't want to. They've done enough to capture the 95% of people who can't be bothered to circumvent the paywall. By keeping these holes open they have also helped to keep more traffic to deliver ad impressions and raised the number of print subscriptions (still their primary revenue source). They have also mirrored the non-digital world in that the Times is something that you pay for, but you can still get it for free if you put forth enough effort. Social linking, hunting down search links to articles, and deleting cookies is just the digital equivalent of taking your friend's finished newspaper or picking up a discarded copy on the subway.
The New York Times paywall is a big step in a larger long-term strategy to change the landscape for newspapers online. They are evolving so they can continue to succeed as the internet disrupts their industry. They, along with a few other industry leaders, are recognizing that they must not only change their business model, but also slowly change their customer's fundamental expectations about paying for content on the internet. They know they must succeed where others, like the music industry, have failed, and they seem to be on the right track.
So what about Netflix? They have established themselves as a company that thinks long. It's worth noting that their name, "Netflix," implies merely a combination of internet + movies. Nothing about DVDs or "discs" or the mail, which was their only business for many years. That wasn't a lucky choice over "Netdiscs" or "Mailflix." They knew what they were doing when they chose the name because they understood the future of their industry. I think there are a number of long term reasons why Netflix made this move. They need more revenue to pay licensing fees to content providers, so a price hike for the more expensive option (DVDs cost Netflix about ten times more to distribute) makes sense. Another reason is that by having fewer people go the DVD route, content providers may be inclined to license more of their titles to Netflix for streaming. Right now their streaming service has only 20% of the selection of their library and includes the worst of the worst (like every straight-to-video movie ever made). Netflix has so much market share that shifting 35% of their customers to streaming-only could force content providers to offer their newer and better titles to Netflix's streaming service. Netflix has already played the biggest part in killing the local video store, now they may have enough market power to kill the DVD entirely.
The flood of criticism towards the New York Times has been reduced to a trickle now that the paywall has been relatively successful. I suspect the same flood of criticism being leveled towards Netflix will dry up as well once it becomes clear what their true long-term plans are.