1. Reality Check
Up until now Netflix's primary expense has been postage. The 45 to 50 cents it takes to get us those red envelopes. It doesn't take a rocky scientist to see that depending entirely on usage patterns that business can be very low margin or a loss due to the cost of delivery. This upward cost pressure made an eventual increase in the price of the service inevitable. Secondly, while the Netflix streaming service started out as some nice extra change for content providers, they have figured out that just like the cable companies they've been exploiting with high content fees, they'd like to do the same with Netflix. This applies pressure to the company in two very important ways. 1. The cost of content greatly affects the math used to keep the service in the black as it grows. 2. Pressures the company to get rid of its commercial free model. One of the things that makes the service great is that at a lower time expense from cable or any other media, and at a lower cost, you get entertainment you want. Finally, Hastings realizes that his goal is not to be the cheapest option in addition to cable, he wants to be the replacement to cable.
2. The Master Stroke that is Qwikster
My guess is that Qwikster remains in the Netflix tent for no more than a year. Hastings will use that year to show its profitability and success as an independent company (coupled with the 8 or so years of results before streaming was introduced) Then Qwikster will have a big for sale sign in front of it. Netflix will get a windfall of billions and the cash will be used for a content spending spree. (It should be noted that exclusive content deals expire over the next couple of years). With Qwikster out of the way, Netflix will be able to focus on becoming the new cable company. One that requires no onsite technicians, no cables, and hopefully no commercials. Remember the days when cable meant virtually no commercials? That would be Netflix for at least another 5-10 years. Further, by rebranding the mail DVD business, when it finally goes the way of the dinosaur, eight track, cassette tape and the floppy, no one will see it as a Netflix failure.
3. Content Rules
Netflix knows that content rules as king. But they have also invested longer than anyone else in getting themselves a platform that s easy to use and works well. I'd be surprised if they hadn't also amassed a view patents along the way. This means that while their present spate of content is somewhat underwhelming, they can still pack a punch others can't. When the time comes, we may see them get back in the fight for Hulu or wait out their current content contract slump until they make a bigger splash. Once they do, you can kiss Blockbuster's soon to be announced streaming service and other comers goodbye. (Seriously, can Blockbuster do anything right anymore?)
Some of the comments have been frightfully naive regarding the Netflix pricing, Qwikster change. Netflix is first and foremost a business. Their job is to make money. Their costs are going to skyrocket next year and I'd rather pay a higher (but still way cheaper than $75+ for cable) price and have the service viable then have it disappear like so many too good to be true items before it. Hope I'm right, I really don't want to go somewhere else to stream..
The Hastings Letter: