Netflix how I love you let me count the ways...okay I'm not going to count but I will give them some free PR (as I have done several times).
How do they make their money?
If you've been living under a rock for several years then I feel the need to tell you that Netflix is a service that started out as a DVD rental service through the mail. You would go online and pick out the DVDs you want to watch, and they send them to you. You send them back (one at a time or more) and you they send out the other ones on your list. Seems simple. And it was, and it made them boat loads of money, Total Revenue in 2009 was 1.6 Billion. In 2002 Netflix stock was around $5/share, by 2009 around $40/share, by 2010 $120/share, and currently it is at $211/share. Part of Netflix's success is the first sale doctrine. It basically says if you buy it, you have the right to sell it, or rent it. There are alot of stipulations like reselling digital good like music but for many physical goods if you buy it you can sell or rent or do what ever. So for Netflix to operate they need to buy DVDs and Blu-Rays and lots of them. Then they need to setup shipping facuilities. According to unofficial sources there are over 100 of these facuilities. Then there's maintenance costs, DVD replacement, advertisement, website upkeep and all that jazz. But once you have over 10 Million subscribers all of these costs become manageable.
Just DVDs by mail?
If all Netflix did was mail out DVDs they would become a success we could end there. But the story of Netflix is much larger than this. By 2008 Netflix had started a service that was optional and free with their DVDs by mail service which allows users to watch video instantly over the internet using their PC. Watching videos over the internet was not a new idea. And watching full length films over the internet was not new either. Amazon, Yahoo, Hulu, Microsoft, Google, Sears, KMart, Wal-Mart, Apple, and several other video streaming sites started trying to charge for videos and full length movies, some came before Netflix some after. But Netflix was different in several ways. Instead of paying for the content users were paying for access to the content. They were paying for an all you can eat subscription based service. At first it didn't seem like a veriy high priority for Netflix and I still believe that if video streaming failed for them that they will recover with DVD rentals.
Again the story seems like it could end here. Netflix started out with great service in DVD rentals, then moved into video streaming and end of story right? Well not quite. You see the movie industry has a problem with all of this. Because the way they see it, Netflix is making money (lots of money remember), by providing content to users, when Netflix doesn't own the content, but rather the movie industry does. They think Netflix is making money off of their content. And with other video streaming services I can see that argument. If I rent a movie through Zune marketplace, and it costs me $5, being the movie industry I would be upset if I didn't get some percentage of that $5. But with Netflix users pay $9/month (or up) and get access to hundreds of thousands of movies.
Haters gonna hate.
So how much should the movie industry charge Netflix to stream a movie to all the users that request it? Well obviously more popular movies should cost more. And newer movies (again probably more popular as well) should charge more. But what if the movie industry charged $16 Million for a single title for a two years? Seems a little high since for that price Netflix could buy about one million DVDs of the same movie and rent them over and over again. This is where the trouble begins for Netflix, because there is no first sale doctrine for digital sales only physical ones. So they can do what ever they want with purchased DVDs, but for streaming they have to agree to what ever arrangements the movie industry lays down, take it or leave it. And if they aren't careful they may bleed the golden good dry. So for Netflix streaming to be a success, the movie industry needs to be on board. Otherwise Netflix will just go back to being a DVD by mail company. Beyond the movie industry, companies like Comcast hate Netflix because of the extra bandwidth needed to stream movies, movie theaters hate Netflix because I can wait for the DVD and have the convenience of watching at home,
My experience.
So where do I stand in all of this? Well as a service Netflix is awesome. I get new movies through the mail. I also get to stream as much movies and TV shows from them on top of it. And the selection seems adequate. You probably won't find a specific title you are looking for, but there is tons of great content new and old. Lots of documentaries and independent films are on Netflix too, because the film makers see the value in Netflix as a distribution medium. You can also stream video on the go, and watch movies with several smart phones. They've also added integration with Xbox, PS3, and Wii, and adding more social aspects into the Xbox 360 and Facebook.
If only the movie industry could see the value in Netflix and what they are doing right maybe we could all just get along and be happy together. Take this example for instance. I've had some issues with streaming in the past on a few videos. I moved on and tried watching something else. I went back later and it played fine. Then I found this in my inbox:
Netflix saw I had problems, and compensated me with a 2% credit. I realize how small 2% is, but when was the last time you got this kind of service from a distributor of films from a company as large as Netflix? If I had a scratched disk from Blockbuster, would they replace it and then give me a refund? If you ever need more convincing of Netflix's service, ask someone who uses it and I'm sure they'll have only nice things to say about it.
How do they make their money?
If you've been living under a rock for several years then I feel the need to tell you that Netflix is a service that started out as a DVD rental service through the mail. You would go online and pick out the DVDs you want to watch, and they send them to you. You send them back (one at a time or more) and you they send out the other ones on your list. Seems simple. And it was, and it made them boat loads of money, Total Revenue in 2009 was 1.6 Billion. In 2002 Netflix stock was around $5/share, by 2009 around $40/share, by 2010 $120/share, and currently it is at $211/share. Part of Netflix's success is the first sale doctrine. It basically says if you buy it, you have the right to sell it, or rent it. There are alot of stipulations like reselling digital good like music but for many physical goods if you buy it you can sell or rent or do what ever. So for Netflix to operate they need to buy DVDs and Blu-Rays and lots of them. Then they need to setup shipping facuilities. According to unofficial sources there are over 100 of these facuilities. Then there's maintenance costs, DVD replacement, advertisement, website upkeep and all that jazz. But once you have over 10 Million subscribers all of these costs become manageable.
Just DVDs by mail?
If all Netflix did was mail out DVDs they would become a success we could end there. But the story of Netflix is much larger than this. By 2008 Netflix had started a service that was optional and free with their DVDs by mail service which allows users to watch video instantly over the internet using their PC. Watching videos over the internet was not a new idea. And watching full length films over the internet was not new either. Amazon, Yahoo, Hulu, Microsoft, Google, Sears, KMart, Wal-Mart, Apple, and several other video streaming sites started trying to charge for videos and full length movies, some came before Netflix some after. But Netflix was different in several ways. Instead of paying for the content users were paying for access to the content. They were paying for an all you can eat subscription based service. At first it didn't seem like a veriy high priority for Netflix and I still believe that if video streaming failed for them that they will recover with DVD rentals.
Again the story seems like it could end here. Netflix started out with great service in DVD rentals, then moved into video streaming and end of story right? Well not quite. You see the movie industry has a problem with all of this. Because the way they see it, Netflix is making money (lots of money remember), by providing content to users, when Netflix doesn't own the content, but rather the movie industry does. They think Netflix is making money off of their content. And with other video streaming services I can see that argument. If I rent a movie through Zune marketplace, and it costs me $5, being the movie industry I would be upset if I didn't get some percentage of that $5. But with Netflix users pay $9/month (or up) and get access to hundreds of thousands of movies.
Haters gonna hate.
So how much should the movie industry charge Netflix to stream a movie to all the users that request it? Well obviously more popular movies should cost more. And newer movies (again probably more popular as well) should charge more. But what if the movie industry charged $16 Million for a single title for a two years? Seems a little high since for that price Netflix could buy about one million DVDs of the same movie and rent them over and over again. This is where the trouble begins for Netflix, because there is no first sale doctrine for digital sales only physical ones. So they can do what ever they want with purchased DVDs, but for streaming they have to agree to what ever arrangements the movie industry lays down, take it or leave it. And if they aren't careful they may bleed the golden good dry. So for Netflix streaming to be a success, the movie industry needs to be on board. Otherwise Netflix will just go back to being a DVD by mail company. Beyond the movie industry, companies like Comcast hate Netflix because of the extra bandwidth needed to stream movies, movie theaters hate Netflix because I can wait for the DVD and have the convenience of watching at home,
My experience.
So where do I stand in all of this? Well as a service Netflix is awesome. I get new movies through the mail. I also get to stream as much movies and TV shows from them on top of it. And the selection seems adequate. You probably won't find a specific title you are looking for, but there is tons of great content new and old. Lots of documentaries and independent films are on Netflix too, because the film makers see the value in Netflix as a distribution medium. You can also stream video on the go, and watch movies with several smart phones. They've also added integration with Xbox, PS3, and Wii, and adding more social aspects into the Xbox 360 and Facebook.
If only the movie industry could see the value in Netflix and what they are doing right maybe we could all just get along and be happy together. Take this example for instance. I've had some issues with streaming in the past on a few videos. I moved on and tried watching something else. I went back later and it played fine. Then I found this in my inbox:
Netflix saw I had problems, and compensated me with a 2% credit. I realize how small 2% is, but when was the last time you got this kind of service from a distributor of films from a company as large as Netflix? If I had a scratched disk from Blockbuster, would they replace it and then give me a refund? If you ever need more convincing of Netflix's service, ask someone who uses it and I'm sure they'll have only nice things to say about it.