Tough competitor Netflix knows how to compete

Posted: July 15, 2011

If this week's online fury over Netflix's price increase proved anything, the obvious choice was this: You can't take away a good deal and not expect people to squawk.

Netflix said it was dropping its $10 rock-bottom subscription fee for its combination service - unlimited video streaming plus unlimited DVDs by mail, one at a time. To get the same combo, customers will have to cough up $16 a month, or $7.99 apiece for either streaming or DVDs.

Within hours, tens of thousands of customers had complained online - on Netflix's blog, on its Facebook page, and anywhere else they could think of. Many promised to cancel rather than submit.

But step back for a moment and consider the evolution of Netflix since it was founded all of 14 years ago, and a different lesson emerges: Competition works - maybe sometimes a little too well.

Netflix's business has shifted dramatically since it began streaming in 2007. Last year, it said, it passed a major milestone "with the majority of our subscribers viewing more of their TV shows and movies via online streaming than by DVD."

But what happened en route? Netflix was a video-store killer.

In my Northwest Philadelphia neighborhood, Netflix plainly helped put the last nail in the coffin for TLA Video in 2009. This year, the neighborhood Blockbuster finally bit the dust - a few months after that once-leading video chain filed for bankruptcy.

Of course, Netflix was hardly all to blame. In the fast-shifting worlds of technology and media, nothing is simple, and Netflix surely didn't succeed just because customers preferred home delivery. Many found the delayed gratification of video by mail to be a major drawback.

What made Netflix so successful in the DVD realm was its efficiency. It managed amazingly quick turnarounds using the much-maligned Postal Service. Its pricing beat the competition even for those who watched just a handful of DVDs per month. And its subscription model helped quash one of the most annoying features of the video-store business: late fees.

Before it finally stumbled, my neighborhood video emporium valiantly fought back.

TLA cut its rental prices and lengthened its terms. It even copied the all-you-can-watch model. At its remaining stores, in Center City and Bryn Mawr, TLA customers can subscribe to unlimited DVDs just as with Netflix: two at a time, as many as they want, for $20 a month - a service Netflix now offers for $12 a month.

Blockbuster went a similar route, backing off on late fees and introducing a subscription service. But Blockbuster proved no match for a business that never had to open a single store, and that was aiming at video streaming - a service its founders said they had in mind when they named the company back in the 1990s, when streaming always seemed just past the horizon.

Today's video streaming, Netflix-style, offers a sometimes frustrating mix, to be sure. You can't expect the latest TV shows or new movie releases to be available on its Watch Instantly service. But if you love watching old movies or specialty genres, or just exploring things you've never seen, it's hard to argue with Netflix's claim that "$7.99 is a terrific value for our unlimited streaming plan."

Will Netflix kill the competition in streaming, too? That's unlikely.

As with DVDs, it starts with a price advantage over its obvious competition: the cable and satellite companies that dominate home-video services and that, in cable's case, control most of the broadband networks that video-streaming services rely on.

There have already been some high-profile tussles, such as a dispute last year between Comcast and Colorado's Level 3 Communications, an Internet backbone provider. Level 3 said Comcast was demanding higher-than-customary charges for carrying its traffic, apparently concerned about the demands that Netflix's streaming would place on its network.

That happened just as Netflix was making a big push into online video with a $7.99-a-month streaming-only deal that outflanks even the least-expensive offerings of cable and satellite TV.

By March, according to Nielsen Co., Netflix already had topped all its online competition in how much video customers watched each month: Netflix users stream nearly 10 hours, almost twice the amount viewers use on Hulu.

Netflix may lose some customers with its price increase. But don't dismiss its reading of the market. The one thing it has shown is that it knows how to compete.

Contact staff writer Jeff Gelles at 215-854-2776 or


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