The Netflix Revolution

The latest quarter results for Netflix, a service website that enables its users with access to television shows and movies via online streaming and in the mail, saw its membership increase by 610,000. According to CEO Reed Hastings, this marked the biggest surge in the number of users, a sharp rebound from a debacle last summer when 800,000 members quit the service following an unexpected price hike and Netflix’s decision, which has since been reversed, to separate the company’s streaming and mail-order DVD rental businesses.

In an industry once dominated by firms like Blockbuster and Hollywood Video, Netflix has since taken over the competition by revolutionizing the video rental process. First, it pioneered the movie-by-mail business that put many video rental stores out of business. Instead of having customers travel to the stores, Netflix essentially reversed this relationship by directly reaching out to the customers themselves.

The company also made highlight in making a smooth transition from “old technology” (delivering movies via mail) to “new technology” (having an online database that streams movies and shows online). Since then, Netflix has transformed the way people watch television shows and films. Currently, it boasts over 75 thousand selections for its 24.4 million subscribers in the US, Canada, and even parts of Central America.

Critics of the company are quick to posit that the success of Netflix is an ephemeral phenomenon. They claim that just as Netflix was able to overtake its competitors in a short span of time, it too will be a victim of technological innovations in the near future. All businesses rise and fall. People believed MySpace would last for a long time, given the great level of innovation in networking it brought to the market at the time… until companies like Facebook emerged. Perhaps there will be a time when a new innovative high- flier shuts down Netflix’s business. However, current conditions indicate that it won’t happen for any time soon.

In the midst of heightened public sensitivity over Internet piracy due to H.R.3261 (Stop Online Piracy Act) and S.968 (Protect Intellectual Property Act), Netflix is one of the few that is insulated from the consequences of these legislations. Although Representative Lamar Smith (R-TX) has withdrawn the House bill, the Senate legislation is still up for debate. However, regardless of whether PIPA is passed into law or vetoed, Netflix will be in good standing.

If the bill passes, Netflix would become the most financially viable option to watching shows and movies for many consumers. Besides the computer gurus who might be able to work around the regulations and download from illegal websites or networks, most consumers are left to seek legal alternatives. Having to pay ten dollars for a movie ticket versus paying eight dollars for a monthly Netflix membership fee, the consumers would much rather choose the latter because consumers can access many more shows while paying less per shows that they watch. By having a Netflix account, subscribers can view thousands of television shows and movies provided by the website. Rather than being able to watch the one movie from buying the movie ticket, consumers can watch many more shows for the same price.

Furthermore, having the ability to stream for shows online eliminates the implicit costs of time and money to travel to video stores or the movie theaters. Therefore, consumers who may otherwise not have subscribed to Netflix will have even more incentives to subscribe if online piracy regulations are passed into law.

This may give Netflix a near monopoly power over the industry, which they can leverage to hike up membership fees. However as long as they can adjust their monthly charges at a reasonable rate, it seems hard to doubt the continuity of Netflix’s high- flying success. Even if the bill is not passed, Netflix can still potentially benefit from this result, as some consumers worried about the legitimacy of their pirated contents may end up switching to the legally viewable sites like Netflix.

Additionally, in a high-piracy environment, Netflix can profit from favorable contracts with media companies. As content owners become more disheartened to see their content being shared without them receiving any revenue, they will offer more favorable negotiating terms to Netflix, which can help them monetize beyond box-office tickets, pay-per-view or DVD sales.

Internet piracy will never completely go away, but the ebb and flow is something that Netflix can capitalize on. Perhaps Netflix is the true winner of this ongoing battle over online piracy.