What Netflix’s Turmoil Means for You

The business press (and even the non-business press) has been clucking about the seemingly disastrous third-quarter report delivered Monday by Netflix. The once-dominant movie rental service announced that it had lost 800,000 subscribers this quarter (and has no real plan for how to win them back), predicted that it will lose money for the next few quarters because of the cost of international expansion, and prompted an after-hours sell-off that marked a sharp plunge in value overnight into Tuesday. Those facts aside, it would be mistake to count Netflix out; for all its recent New Coke-style blunders, it’s still leading the transition from DVDs to streaming for moviewatchers at home. Even better: its letter to shareholders (PDF) revealed a viable course of action to turn the now-fledgling company around — though customers who’ve come to rely on Netflix’s vast movie library probably won’t be happy.

Recent missteps — the sudden doubling of the subscription price, the Qwikster debacle — haven’t deterred the company from its strategy of de-emphasizing the DVD business to focus on streaming. The result may have cost the company nearly a million subscribers, but it still has 23.8 million, with some 90 percent of them are already paying for streaming. Whether customers continue to be alienated by the company’s sudden shifts doesn’t seem to matter; Netflix doesn’t seem to mind becoming a specialized service with specialized content.

The short version: Netflix is becoming less of a movie-rental service and more of a premium cable network that streams to you over the Internet. Newly signed content deals, like the one with the CW network, and pre-existing ones (like the AMC deal that brings streaming episodes of ‘Mad Men’ exclusively to Netflix) mark the shift toward more TV fare, exclusive programming that Netflix hopes you’ll pay $ 8 a month for much like you might for HBO or Showtime.

Conversely, there’s less emphasis on what used to be Netflix’s strength, its vast movie library, which is available primarily on the DVD side. Spending $ 1 billion over four years for the various CW series means Netflix isn’t committing resources to beefing up the movie library, as many customers have already noticed.

To succeed as a premium-cable-type outlet, Netflix doesn’t have to be all things to all people; as the All Things D blog notes, it just has to offer enough good programming unavailable elsewhere to hold onto a steady subscriber base.

To customers (and clearly, to shareholders), however, it doesn’t seem to make much sense for Netflix to abandon the service that it does better than anyone else and has a near-monopoly on, in order to be just another streaming company — competing with Hulu, Amazon, and Dish’s Blockbuster services. The DVD side may not be growing, but 60 percent of Netflix’s customers still use the service.

Apparently, Netflix thinks it can offset subscriber losses and international expansion costs with eventual savings from reduced shipping costs on DVDs and from not having to pay for new licensing fees every time it negotiates a deal in a new country. Without shipping costs, being in the streaming business simply means being in the licensing business, and Netflix must figure it can spend money more intelligently there, not just by buying the right content, but also by making it available in multiple territories. That’s always a stumbling block, but the amount Netflix is spending to expand internationally (enough that Netflix expects to spend a few quarters in the red) suggests that the company figures it can monopolize territory the way it once monopolized DVD rentals.

As a movie fan, that means the company is less and less interested your business — at least if that means making a wide variety of DVDs available to you. Better get used to it. After all, it’s not just Netflix that wants to phase out DVDs; the Hollywood studios do too, and for the same reason: streaming is a lot cheaper on the supply side. The shift is apparent all over, from the recent launch of the Ultraviolet movie storage cloud to the announcement Monday that Warner Bros. will soon take all ‘Harry Potter’ discs off the shelves, but continue to sell streaming and digital copies of the ‘Potter’ movies. Netflix is still one of the biggest players making this transition, and others will follow without worrying about looking foolish for emulating Netflix.

Meantime, Netflix can expect to endure a lot more ribbing, of the sort marked in this recent ‘Saturday Night Live’ sketch (cut from last week’s show before airtime), in which Netflix CEO Reed Hastings (played by Jason Sudeikis) is made to look clueless and inept. But Netflix could still be chuckling all the way to the bank.