Netflix’s New Business Model

When I’m not outsourcing my thoughts about entertainment technology to Tim Carmody, I’m outsourcing them to Tim Lee, who is baffled by what Netflix’s decision to split its DVD service and streaming video service:

The DVD-rental option gave Netflix a crucial fallback position at the negotiating table. Because Netflix has a complete catalog of movies available for rent by DVD, they don’t need any specific title in streaming format. So they could cut deals with the content creators that offered them reasonable terms, and stick with DVD rentals for the rest. That’s a little bit inconvenient for customers, but it’s better than agreeing to terms that would force Netflix to jack up its prices.

And, of course, the total size of Netflix’s user base strengthens its bargaining position as well. There are many customers like us who primarily subscribe to Netflix for the DVDs, but we’re willing to pay a bit extra for the streaming option. A Netflix with 20 million customers—DVD and streaming—is going to be able to make bigger bids for streaming content than a streaming-only company with 10 million customers.

The other Tim agrees. One thing I’d be very curious to see a discussion of is how the Postal Service’s current woes were impacting the Netflix business model. What happens if the Postal Service stops Saturday delivery? Losing 17 percent of your delivery days isn’t minor. Or what happens if delivery suddenly gets considerably more expensive in a way that would have forced Netflix to significantly increase the prices for DVD delivery, at a time when ISPs are complaining about the amount of bandwidth eaten up by Netflix users? I’m not saying this move makes sense for Netflix ability to negotiate better content deals, or that consumers ought to be happy about it, but is there a possibility that Netflix is heading off a bigger infrastructure problem by spinning off half of the business?