Netflix’s shaking empire

Netflix’s once-pristine image is now suffering due to a slew of changes within the company and the DVD realm itself.

Until Sept. 1 of this year, Netflix offered DVD rentals and unlimited video streaming for as little as $9.99 a month for subscribers. But now, those options are sold separately. Netflix’s unlimited streaming-only plan remains at $7.99 a month, while its “one DVD at a time” plan, in which DVDs ordered online are sent to the customer by mail, costs an additional $7.99.

The DVD-by-mail service will now be called Qwikster, while the streaming service will continue to be offered under the Netflix brand. Customers can still subscribe to both services, but will have to pay two separate bills at a total of $15.98 per month – almost 60 percent more than Netflix’s initial rate.

Netflix management believes the convenience of Internet video helped the company add 17 million U.S. subscribers over the past three years, according to CBS establishing the company as a major player in the entertainment industry, according to CBS News.

As a result of these changes, millions of Netflix customers are limiting their subscriptions to either a streaming-only or DVD-only plan in an attempt to save money in the downgraded economy, according to School of Management business law professor Kabrina Chang.

Many simply canceled their subscriptions to protest the new pricing.

College of Communication sophomore Michelle Hayward expressed her concern about the raging price.

“I can’t just give up DVD-by-mail because I love the show ‘Stella’ and they don’t offer it on streaming, only by DVD,” Hayward. “That means I have to pay a lot more.”

College of Fine Arts sophomore Maria Decotis said she already canceled her account.

“You will find [that] $16 a month will really add up at the end of the year,” Decotis said.

Keep the change

Despite some negative feedback from customers, Netflix CEO Reed Hastings said he believed the company would be able to increase subscribers. According to CBS News, Hastings predicted that Netflix would reach 25 million subscribers at the end of September, up from 24.6 million in June.

However, Hastings’ prediction was premature, as customer backlash against has been much more vitriolic than Netflix anticipated. In response, Hastings adjusted Netflix’s projected growth to 24 million, according to CBS News.

Sabina Karim, professor of business strategy, said Netflix’s move was understandable.

“There are usually three phases of movie production: in theatre, on DVD and streamed online,” said Karim. “As fewer and fewer customers choose to buy DVDs today, major movie production studios will demand Netflix and other online distributors for higher fees to get the licensing rights to their content. This is a trend that caused Netflix to dig deeper into its subscribers’ wallet.”

Hastings has even gone so far as to apologize to subscribers for “arrogance based upon past success” in a mea culpa he posted on the Internet, formally announcing plans to separate the company’s DVD and video streaming services.

“I messed up,” wrote Hastings. “I owe everyone an explanation. In hindsight, I slid into arrogance based upon the past success. We have done very well for a long time by steadily improving our service, without doing much CEO communication. Inside Netflix I say, ‘Actions speak louder than words,’ and we should just keep improving our service.

“But now I see that given the huge changes we have been recently making, I should have personally given a full justification to our members of why we are separating DVD and streaming, and charging for both,” he continued. “It wouldn’t have changed the price increase, but it would have been the right thing to do.”

Sign of desperation?

Netflix has recently launched a streaming deal with DreamWorks Animation, according to CNN Money – and unlike many contracts held by the company, this one is exclusive.

The multi-year agreement gives Netflix the exclusive streaming rights to some of DreamWorks’ movies and TV specials, but it won’t be integrated until 2013. Will consumers be patient enough to wait that long?

Aside from DreamWorks’ new titles that will be available for streaming, starting with movies released in 2013, older movies such as Chicken Run, Madagascar 2 and Kung Fu Panda, will also be made available.

Is this partnership going to calm angry customers?

Decotis said she doesn’t think so.

“As a grown-up, adding animation movies doesn’t help,” said Decotis. “It was a desperate move by Netflix. Why can’t I just have all my content through one service? If you don’t have a subscription service with every darn company out there, then you are out of luck.”

The contract is, at least, a “game-changing deal,” said DreamWorks animation studio CEO Jeffrey Katzenberg in an interview with The New York Times.

“Consumers in the near future will not distinguish between TV-based and Internet-based movies,” said Katzenberg. “We are really starting to see a long-term road map of where the industry is headed.”

Ted Sarandos, Netflix’s chief content officer, said he saw promise in the deal.

“You’re seeing power moving back into the hands of content creators,” Sarandos said in an interview with The New York Times. “When a company like DreamWorks ends a long-running pay TV deal – when a new buyer in the space steps up – that’s a really interesting landscape shift.”

Film studies professor Charles Warren has his own concerns about the trend toward streaming movies.

“I know that people increasingly like Internet-based movies,” Warren said. “But it is a special and great experience to see a 35mm print projected on a big screen in a theater, especially if it is a great film. People who just watch computers don’t know what they are missing.”

Film studies professor John Hall said he believes the “buzz” about viewers cutting the cable cord and switching to the Internet is more about economics than anything else. He views Netflix as a complement to television because Netflix provides popular original programming such as Mad Men and Dexter.

Crowded marketplace

While Netflix works to weather a difficult year, Amazon has upped the ante.

On Sep. 19, Amazon announced that its Prime instant video service has signed a contract with Fox. The deal will add more than 2,000 movies and television shows to Amazon Prime’s streaming video library.

Amazon said the content will be available for unlimited streaming “later this fall” through Prime, a $79 yearly service that also includes two-day shipping, according to a CNN Money article.

As a streaming service for 11,000 movies and TV shows, including content from CBS, Sony, and NBCUniversal, Amazon also offers an individual instant video service, where any customer can choose from 100,000 titles and pay individually without subscription.

“Amazon is Netflix’s biggest rival, especially with the new Kindle Fire coming up. I believe Kindle Fire is going to be a major hit on the market,” said Karim. “It’s much cheaper than iPad and much more compatible. But most importantly, it is so much more than an E-book reader. It is technically an outlet for online contents. Consumers will find it extremely easy to find an Amazon application and watch streaming movies from their company rather than Netflix.”

According to the CNN Past Fortune blog, Google Inc., which owns YouTube, is also eager to expand its Internet video offerings to include more movies. One way Google could achieve that would be to buy Hulu.com, a website that has Fox streaming rights.

With some unhappy customers and so many competitors, will Netflix make through this tough year? We shall see.