Netflix may be showing us something about the streaming video market with its decision to raise the prices for “combination packages” of mail and streamed video services. The new policy is to price the two independently rather than to discount the combination, a move that raises the monthly price by about 50% and impacts nearly 60% of Netflix customers. It’s certainly a big step, so why take it? Because you have to, for three reasons.
The big problem with OTT video is that it’s totally dependent on having access to the content, but that it’s not likely to now or ever create the revenue stream to generate all that content on its own. It has to license material from others. Because any base of video will eventually pall for users unless it’s continually refreshed with new material, that licensing process is ongoing. Because old stuff is cheap to license and new stuff typically more expensive, the need to get more material pushes the OTT player to newer and more expensive material with each refresh, and thus raises its cost.
A second problem is that the people Netflix is licensing content from are the same people it’s competing against. TV and movie companies want you to watch their material in the traditional way, not suck it over your broadband connection. If broadband streaming is truly supplemental in terms of use, then it’s not a threat but rather a potential incremental revenue source (hence TV Everywhere). If cord-cutting really does become an issue, then the first response of the content producers is to make up their losses in traditional channels by charging more for material.
The third issue is Netflix’s need for growth. Netflix has followed the classic “all-you-can-eat” Internet pricing scheme, which means it can grow revenue only by adding subscribers or by raising prices. Competition will make even sustaining their current base more difficult over time, and that leaves only the second option.
It’s also likely that Netflix will face higher costs beyond content licensing. The greater competition will mean more spent on marketing. Any growth in the number of videos streamed per user will drive up its server or caching costs, and network operators are increasingly demanding some settlement for the traffic Netflix is generating. This means that the company’s financial performance would tend to sink over time unless revenue growth was even higher, problematic for all of the reasons cited.
It’s not unlikely that Hulu’s founders are interested in selling in part because the streaming business model is problematic even if you have some of your own content to contribute. The reason is that unless each content owner involved in Hulu charges a fair market rate for its stuff, it’s undermining its own revenue stream and hurting its own shareholders. There can be no free ride for online video. Which, of course, means it can’t be free. Which, of course, means that the notion that the Internet is going to be our free pass to everything we want in the future is nonsense. Which means we need to figure out how to make money for everyone in the food chain before we upset the whole market dynamic.