Netflix Is Dragging Its Kicking, Screaming Customers to a DVD-Free World

I’m one of the thousands of Netflix customers who were outraged by the movie rental giant’s decision to change its pricing structure. No one likes the idea of paying more for less, and no matter how you slice it, that’s exactly what Netflix is asking its customers to do.

Begrudgingly, I’ve decided to drop the DVD portion of my Netflix service and go with streaming only. That chops two dollars off my monthly bill, but it also cuts my movie-watching options in half.

On a personal level, it may take a while for me to get over this switch. On a professional level, however, I must admit that Netflix is making a smart business decision.

I’ve neither seen nor heard anyone from Netflix come out and say it, but if you read between the lines of its official announcements, you can see that Netflix’s ultimate goal is to push customers away from DVDs and toward its streaming service.

No More DVD-Friendly Apps

Netflix told developers in a recent blog post that its application programming interfaces would no longer support applications for managing DVDs, offering further evidence that it wants to become a streaming-only service.

There are two primary reasons behind this strategy — one short term and the other long term.

The short term reason is a need to cut operating expenses. It costs a lot of money to ship DVDs to millions of households across the U.S. and Canada. It’s not as costly as stocking and running all those retail stores that eventually dragged Blockbuster into bankruptcy. Still, staffing distribution centers and paying postage for overnight deliveries means high overhead.

A streaming video service is a much cheaper operation, which eats much less profit.

If you don’t think it’s tough to turn a profit on a DVD-by-mail business, consider this:Walmart took over the entire retail sector by instituting logistics practices — also known as methods of moving goods from point of manufacture to point of purchase — that allow it to consistently offer lower prices than nearly all competitors. Yet, Walmart couldn’t figure out how to make money by shipping DVDs to customers’ homes.

In 2005, Walmart pulled the plug on a service that offered customers two DVDs a month for US$13.00 and three for $18.00. That’s close to what Netflix charges for its DVD-only service today, which explains why it would want to move customers away from the model.

The Beauty of Streaming

It’s interesting to note that Walmart has not given up on the video-rental business altogether. Last year, it purchased a company called Vudu that was in the streaming video business.

So, it wasn’t a total surprise when — just this week — Walmart launched a new streaming video rental service. Visitors to Walmart.com can rent movies for a cost ranging from $1.00 to $4.99 per title. That will be the price per rental; the service doesn’t offer a subscription. It’s sort of like Redbox on the Web.

Walmart entering the streaming business is an interesting development, and it confirms my theory about Netflix’s long-term reason for changing its pricing structure.

The simple truth is streaming is the future of video entertainment. DVDs will be obsolete sooner than most people think. Netflix is trying to get ahead in a game that’s moving extremely fast.

Competitors Are Everywhere

With more than 23 million subscribers, Netflix is by far the leading online video service provider — but if it wants to retain that position, it’ll have to fend off a host of competitors that also realize streaming is the way of the future.

In addition to Walmart, Netflix is now facing potential competition from Amazon and Apple, both of which have recently ramped up streaming video operations. There’s also Hulu, which deals more with television shows than movies, but still lurks as a potential alternative to Netflix.

If that’s not enough, the Fox Network this week announced plans to start charging for the right to stream some of its hit shows from its website. If that works, expect to see other networks do the same, all of which will mean more competition for Netflix.

When it comes to maintaining its market leadership, Netflix has one major advantage and potential major disadvantage.

Netflix’s major advantage is its pricing model — despite the anger currently circulating through the existing customer base. A single monthly fee for all the videos you can download is easy for customers to understand. Because of that, I predict many of those who initially were miffed at Netflix’s decision to restructure pricing — including myself — will eventually settle in with this model.

Content Is Still King

The settling will be easier when people realize how quickly they can run up a sizeable bill paying per-download on one of the other services.

Even with the pricing advantage, Netflix will not be able to maintain market leadership without addressing its biggest weakness: the poor quality of its streaming content. It’s common knowledge that Netflix offers much better movies on DVD.

One popular notion is that separating its DVD and video services could make it easier for Netflix to entice movie studios to allow it to stream content, because it will know exactly how much it can afford to pay for that privilege.

I don’t know whether that’s true or not, but I do know there are other companies offering similar services — Apple and Walmart immediately come to mind — that have expressed a willingness to pay for the right to stream movies much sooner after their release dates than they traditionally have been available on Netflix.

As this industry evolves, Netflix, as well as the other players, should remember that while delivery methods and pricing models may change, one thing won’t: Paying customers ultimately will gravitate to the places with the best content.

If Netflix turns out to be that place, the current flap over the change in its pricing plan won’t even be a footnote in the company’s history.