Netflix: A Marketing Mystery »

It's clear to me that Netflix wants to stop mailing DVD's to customers.  They want everything to be delivered via the Internet - not only their current Instant Streaming library, but everything in their DVD library as well.  They want DVD-by-mail to die.  The trouble is - no one seem to know how to make that happen.  With the Qwikster spin-off, Netflix was trying to further differentiate the products, even more so than the September price-hike attempted to achieve.

But now that the whole Qwikster idea has been abandoned and explained away as confusing to customers, DVD-by-mail is back in the Netflix product line.  Netflix has been in a tough spot for a while, but things keep getting tougher.  Content deals are evaporating, streaming rights are becoming more expensive, and Netflix is dead-set on delivering everything via the Internet directly to your TV.

I don't feel like finding any numbers to illustrate this, but I can reasonably assume it costs more to mail a disc via the USPS than it costs to stream the same movie (in HD no less) over the 'net.  There also aren't any physical bottlenecks like being limited to a number of discs of a particular movie being available to mail out (though I can't discount the ability of contracts to limit simultaneous streams), and each disc has its own cost.  The profit margins on streaming must be significantly higher than the DVD-by-mail business.

The problem is obvious, right?  Netflix needs content to stream that consumers actually want (and they need it at a fair price with reasonable rights... blah, blah, blah).  Adding seventy-five more documentaries about pot and every season of "The Wonder Years" will only get you customers who are actually looking for that content.  When you do get a lucrative deal - like the one with Dreamworks - it doesn't help today if the content doesn't show up until 2013.  Netflix needs box office hits.  What's standing in their way?

When Steve Jobs (R.I.P., Sir) negotiated deals with the recording industry for the iTunes Music Store, he did everything on his terms.  Those terms would be summed up in two numbers (well, one number repeated twice - "99" cents.  There was no one else in the market selling MP3's - at least no one serious and legitimate - and the recording industry was being desimated by an antiquated and defunct business model (though they'd tell you it was piracy).  iTunes saved the day, and we all know the rest of the story.  The funny thing is, while the RIAA might tell you that the piracy rate is growing, far less music is pirated today than was pre-iTunes.  I can, in fact, listen to anything I want for $10 or so per month - legally.  See: Spotify, Pandora, rdio, etc. Consumers are willing to pay for content if it's easy - they only pirate when it is otherwise locked away.

Meanwhile, the Motion Picture industry wasn't just sitting around watching... movies.  They saw how the explosion that was iTunes and the iPod actually came back to handicap the recording industry.  They saw DRM fail.  They also saw people get access to fast enough home Internet connections for their own content to be downloaded in hours instead of weeks, and piracy began invading the motion picture realm.

Most of all, they learned to fear the single, big player who wants to get all the distribution rights on their own terms, and I can't blame them for being cautious.  Netflix is a single, big player - they have the most customers and content of any of the set-top-streaming services (think: Hulu, Amazon).  Movie studios simply won't play ball if Netflix is the only player in the other dugout.  So, they keep their content locked up on a disc, "secured" with easily-breakable DRM (this is just a DMCA thing, not a real attempt to secure anything), and consumers who really just want to get the content inexpensively and quickly pirate it.

Herein lies my solution: form a consortium of video streaming providers - Netflix, Hulu, YouTube, Crackle(?).  Negotiate for streaming rights as an industry.  Convince the studios to evolve their business model, and let them do it with multiple partners.  Studios have a dog in this fight - they want to get revenues from their content and not lose them to piracy.  They'll be much more open to breaking new ground if there are working with a bevy of distribution channels.

The streaming providers can differentiate themselves on advertising vs. subscription models, mobile, device integration, and ancillary features such as subtitles and alternate audio tracks.  I know, Netflix would probably give up a sizeable chunk of their market share if they were to align with so many others (they already gave up a lot with the price hike), but there are two factors working in Netflix's favor: they have a big head start integrating into TV's and devices, and the market stands to grow a ton if the right content deals can be struck.

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