Did Netflix just kill its long-tail model?

By Felix Salmon
July 12, 2011
Chris Anderson posted this chart, showing how Netflix's consumers were embracing the long tail of its offerings.

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Back in 2009, Chris Anderson posted this chart, showing how Netflix’s consumers were embracing the long tail of its offerings. As the number of movies in Netflix’s library grew from 4,500 to 18,000, the top 500 movies in the library went from constituting more than 70% of demand to less than 50% of demand.

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This is the wonderful thing about online retailers: they can offer vastly more inventory than their local-store counterparts. And this is the wonderful thing, too, about Netflix streaming, at least as it existed until today. The big problem with Netflix, for many of us, before streaming came along, was always that we would stock up on highbrow ambitious fare which we knew we really ought to see, and then not be in the mood for something highbrow and ambitious when finally we had some spare time to watch a movie. With streaming, you could get the best of both worlds: a selection of fabulous rare DVDs, and instant access to something popular and brainless should you be so inclined.

Those days, however, are now over. You can buy the DVDs-by-mail service, or you can buy the online-streaming service, but to get them both you have to buy them separately: Netflix won’t give you even a single penny discount for getting both together rather than one or the other. In unscientific polls, more than a third of subscribers say they’re going to cancel; I doubt that anywhere near that many will follow through on that threat, but the fact is that Netflix offers much worse value going forward than it has done up until now. Streaming is great, but the selection is still extremely limited, and sometimes it doesn’t work at all for people with spotty internet connections. Having a few DVDs in familiar red envelopes was quite lovely, just in case there were problems with the internet, or you were about to go on a long journey with a laptop, or you needed to watch something only available at the end of Netflix’s long tail.

In shoving people out of their DVDs-by-mail schemes and into the streaming-only option, Netflix is reversing the trend seen in Anderson’s chart: the proportion of demand accounted for by its top 500 titles is almost certainly going to reach new all-time highs. At the margin, this move might well help encourage movie studios to allow their long-tail films to be available for streaming, but that process is going to take a long time and we might never have as much inventory available for streaming as we currently do in the DVD store.

Theoretically, of course, the long-tail model works even better with streaming than it does with physical DVDs, since all the physical problems associated with finding and managing the inventory of pieces of plastic go away, and filmmakers can upload their films for streaming even if they don’t have a DVD distribution model. But it’s going to take many years to get there, and in the mean time I think it would make sense for Netflix to allow its streaming customers to take out on physical DVDs any titles which aren’t available for streaming. That might give Netflix a bit less of a bully pulpit when it comes to negotiations with studios. But it would be much more consumer-friendly.

(Incidentally, is there a reliable number out there for the number of movies available on Netflix streaming? I’ve looked but can’t find one.)

21 comments

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Dear Netflix,

Thanks for the new customers.

With Love,
Redbox

Posted by RonDumsfeld | Report as abusive

Felix, in all seriousness, you need to start spending a little time thinking before posting — your posts increasingly feel like you’re starting from the assumption that whatever a company does is necessarily wrongheaded, and then coming up with sentences to justify that assumption. Your write:

“In shoving people out of their DVDs-by-mail schemes and into the streaming-only option, Netflix is reversing the trend seen in Anderson’s chart: the proportion of demand accounted for by its top 500 titles is almost certainly going to reach new all-time highs.”

No, this is exactly wrong. If you look at the top 100 on Netflix, almost none (typically one or two) of those movies are available for streaming. So if most people want, as it seems safe to assume, to watch the most popular Hollywood movies, then they’re more likely to keep the DVD option than the streaming option. And if they also like the convenience of streaming, then they’re likely to keep both. Regardless, the argument that Netflix’s new strategy is going to force people into streaming-only and increase the proportion of demand accounted for by the most popular titles is completely wrong, as a simple look at the Netflix top 100 would have told you. (Ron, on the other hand, may be right that people will keep streaming for long-tail films and use Redbox for Hollywood hits.)

Posted by FBlair | Report as abusive

I wouldn’t discount the threats to leave.

It is the eMusic syndrome: a big jump in prices that surprised many, amid an attempt to expand services, but poorly timed (waiting for the August surprise?).

When eMusic’s rates shot up in 2009, many people including myself left. Since then, subscriber growth has been flat, even as eMusic says that its per-subscriber earnings has increased.

Hulu+ might siphon off much of those customers, if they can get over their current mini-crisis.

Posted by GRRR | Report as abusive

F**k these guys and their outrageous price increase. Even my cable company didn’t have the cajones to bump my cost 60% in one swoop. What other business thinks it can do this, other than perhaps the Big Oil after the Middle East blows up? I know I can’t do it in my business. Come August 31, I cancel.

This is going to open the market for some new/other enterprising outfit that is a little less arrogant, a little more customer friendly. Think about it; how much trouble would it be to move your business to someone else providing streaming + CDs at $12.99 per month? And how many people would move their account just out of anger over Netflix’s pricing move?

Posted by hjp23 | Report as abusive

Part of the problem is that Netflix just raised rates without showing an improved streaming library (which is way behind the disc library in number of titles and especially in the currency of those titles.) They should have had the cajones to start increasing the title availability and then raise prices.

Furthermore now that they appear to have more money to spend, the rates will rise at the major studios, for streaming rights.

I for one like the discs a lot for better quality, sound and blu ray availability.

And while Netflix moans about postal costs, I have to pay the internet costs – they’re raising the BW requirements at my house which indirectly is another component of cost for streaming that we’ll have to pay to the ISPs.

Posted by LCC | Report as abusive

I like LCC’s reasoning of the company needing to show an improved streaming library before doing this. Anyone have thoughts on why they didn’t do that?

hjp23, the costs to set up the DVD by mail would make it quite difficult for new entrants to replicate anything close to what Netflix is doing. The competition is the kiosk but those can’t have the library NetFlix does. They have a pretty solid moat in the dvd by mail business

Posted by TinyOne | Report as abusive

Perhaps another idea, taking Felix’s premises for granted, would be for Netflix to allow its streaming customers to take out on physical DVDs any titles which aren’t available for streaming but which are as of August 31, 2011 available on DVD; essentially, you grandfather in older movies, but new movies only become available to the streaming customer base when they become available for actual streaming.

Posted by dWj | Report as abusive

NFLX is a great service and a great company… but there is a gun squarely against their head… thus the desperate measures. Content owners like CBS, Disney, TimeWarner, Comcast ect are usually also content distributors. They have all woken up to the fact that NFLX is selling consumers their own content in a more usable package and undercharging for it. The content owners have massively raised prices and even more imporntantly limited product avability to NFLX.

Want proof… look at the numbers:

http://finance.yahoo.com/q/is?s=NFLX+Inc ome+Statement&annual

From 12/31/09 to 12/31/10 NFLX increased sales 30%! Wow that’s delicious growth…

… but over that same time frame cash flow from operations DROPPED 15%. Houston we have a big big problem and a stock at 80x earnings!

It’s AOL 11 years later… if NFLX was smart they would buy dreamworks for 2 billion, Lionsgate for 1 billion, and then try and licence Colombia’s entire library from Sony on the cheap… issue expensive stock to pay for it all. That way they would control some of their own content to fall back on.

Posted by y2kurtus | Report as abusive

The increase is too much! Netflix was the reason I was able to cut the cable bill out of my budget. Almost everything is already available online. I also use a service from the TVDevo website that consolidates all the streaming and on-demand TV content into one place so you can find it easily. For movies, I use Netflix. Between these 2 services, which integrate into the internet seamlessly, I have no Cable TV bill and I don’t miss it.

Posted by laurastammer | Report as abusive

I was paying about $23 for 3 DVDs plus streaming, which was going to go up to $27. Since I don’t use streaming that much, nor watch that many movies, I just changed my subscription to 2 DVDs without streaming for $15. How is that a win for Netflix?

KP

Posted by KentPeacock | Report as abusive

I really don’t understand Netflix’s business philosophy. If it wasn’t for the fact that it makes no sense whatsoever, I would swear that Netflix was literally and intentionally trying to drive away their customers.

First it was the UI changes. They removed the ability to sort titles, see more than one rating at a time, and introduced one of the wonkiest horizontal scroll systems I’ve ever seen. The ONLY reason I can fathom for this is to make it more difficult for users to browse the catalog, thus alleviating the top 500 syndrome. It also makes the browsing experience infinitely more aggravating. Look at the blog post announcing the change. There are 5000 comments (5000 is the comment limit) and most are overwhelmingly negative.

Then there is the removal of content. Over time, I’ve noticed that most of the movies in my instant queue have disappeared. Old content seems to be disappearing much faster than new content is added. I get that the content licensing costs are going up but they need to figure something out here quickly.

Now this rate increase. The regression in service combined with the increase in cost is truly breathtaking. I’ve never seen a company provide so much less and charge so much more at the same time before in my life.

Posted by spectre855 | Report as abusive

Thanks Netflix! Their repricing email made me realize that while i have been subscribed to unlimited DVDs+streaming for 19.99, I haven’t actually watched a DVD for years… I totally forgot about the plan I had subscribed to. I’m happily converting to the 7.99 plan of streaming only. The kiosk downstairs at my apt building + the theater across the road works just fine for anything big I want to catch the Netflix wont stream. And if their streaming collection begins to stink, bye bye 7.99 plan …!

Posted by FDum | Report as abusive

Y2K is right, NFLX has been seriously undercharging for streaming content. The studios are so inept it has taken a couple years for them to figure out what NFLX is doing, and they are going to demand much more money from NFLX, which could not afford it under the current pricing scheme.

I still don’t think $8/mo will be enough to cover their infrastructure, bandwidth, and licensing costs for an all-you-can-watch service. If studios don’t like Apple selling TV episodes for $1, they’re going to hate NFLX giving unlimited access to those libraries for, how much? If a customer watches a few series (like my kids, each), how much can NFLX pay the studio each month? Not enough, I’m guessing. And given that Comcast now owns a network and content, and the government is too afraid/too bought out to enforce anti-trust laws, NFLX may be forced to depend on expanding its HBO_like model of developing its own proprietary content.

I’m just happy I don’t care about TV shows or movies, otherwise I would be upset.

Posted by KenG_CA | Report as abusive

Think, you pod of bloviating baboons. 5,000 comments, most negative. Bloggers and commenters jabbering away! Their marketing consultants are cackling with glee right now. Tomorrow, those fortunate enough to be still employed will, in many cases, be discussing the audacity of a company that doubles its prices over night. Netflix is *not* going to lose 30% of their subscribers; they are counting on the laziness of humans here, and they will be vindicated. They *will* gain new subcribers.

Posted by Uncle_Billy | Report as abusive

This actually works fine for me. I never use streaming. I will switch to the DVD only option and the price will drop for me. I’m a bit peeved that all this time they made me pay for something I did not use.

Posted by EmilianoZ | Report as abusive

Felix, have you looked here:

http://instantwatcher.com/titles/all

This is a cool website that allows you to search Netflix’s instant offerings in a variety of different ways. It also gives you totals. According to their “all” category, there are 12382 titles to choose from.

Posted by spectre855 | Report as abusive

I love Netflix and this price increase changes nothing for me. $8 per month was an absurd price–clearly a teaser. It worked. The service would be a bargain at $50 per month. Compare that to cable TV where one is forced to endure 500 channels of pablum for monthly rates as high as $100. Netflix is wise to raise its prices dramatically. I applaud them.

Posted by pupplesan | Report as abusive

Good grief! It’s a $6 per month bump if you have the DVD w/discs plan now. If that’s too much of an increase for someone, they should probably cancel and find another job.

Posted by kjmastaw | Report as abusive

Personally, I’m thrilled with the move. I’ve found Netflix’s streaming to be complete crap — standard def only, and even at that level the transmission was always poor enough that I’d get A/V issues (problems with the audio’s synchronization to the video, pixelization artifiacts, etc). And that was before I moved from a spot in Mountain View where I could consistently get 6MB download speeds from sites capable of providing it, to a new place in San Mateo where I get only 1MB at best.

Under the new system, I’m paying less for the DVD service, which is all I cared about anyway. Score! If I want digital stuff, I’ll use something like Amazon Unbox, where I can actually fully download a hi-def movie or TV show, and then play it off my TiVo’s hard drive.

Posted by Auros | Report as abusive

I’ve been with Netflix since 2002. We were getting streaming and 5 DVDs with the Blu-ray option. We’ve since changed to only 3 DVDs. Fewer DVDs sitting around, and about $15 cheaper. What’s not to love?

Posted by DougAdams | Report as abusive

Are you really willing to go on record suggesting a $7.00 increase in a monthly service that was ridiculously low will destroy it?

You really think that $16 is too much for endless streaming content and all the movies you can order a month?

In 2011?

You can barely buy bread, milk and sugar for $16 these days. Gimme a break.

Posted by moneywon | Report as abusive