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Old 07-14-2011, 06:00 PM   #342
College Benchwarmer
Join Date: Nov 2000
Location: Amarillo, TX
Netflix does not want DVD to go away, because Netflix wants to dominate streaming as much as possible.

As streaming becomes more commonplace, the problem with streaming becomes more obvious: the more people have seen a certain stream, the more the content provider can claim to be owed. This is the reason Netflix is going to get screwed in the next round of content negotiation: the studios can claim as much value for the most recent viewing as the first viewing. The upshot of this is that increases in rights fees get passed along to the customer.

This is a problem that physical media can mitigate. The DVD business, on the other hand, works in two different models. The standard model is a straight purchase of DVDs. They pay their 13 bucks, or whatever the wholesale cost is, and they can ship that puppy out to as many people they can until it gets worn out or stolen. The Rentrak model is essentially a revenue sharing model where the studios get a cut of every rental for a cheaper buy-in on the retailer's part, but (and this is key) that period ends, after which the retailer can buy the used copy cheap, or return it as part of the lease. In both of these models, unlike the streaming model, the studio's claim on rental revenue ends fairly quickly. Backend profit on physical media will turn out to be much higher than the continuous drain the studios would like to see on streaming media.

The kicker is that as long as the physical media model is alive and well for Netflix, it can use the cheap prices of physical media as leverage against the degree of escalation in streaming rights fees. In addition, the price of physical media is unlikely to rise much, making it much easier to hold the line on subscriber prices. Meanwhile, it wouldn't be shocking to see the prices for a monthly Netflix subscription settle in the $35 per month range three years or so down the line, if they keep a strong content lineup. That could lead to two developments: the restriction of accounts to "boutique" videophiles that see the service as offering as much utility as cable, and the introduction of a la carte pricing per viewing, the way most competitors are set up.

In the long run, combined Netflix service is going to rise. Markedly. Likely to $40 to $50 a month. However, by unbundling services now, Netflix can keep the DVD customers happy while it figures out how bad they're going to have to raise the ultimate level of streaming prices.

Oh, and on the physical side, I'd expect a single price increase in about six months time of about $2, and getting rid of additional charges for Blu-Ray.
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