Netflix and the Big Mistake

Way back in the 1980's, before he was a washed up politician, Arnold Schwarzenegger made a career out of spouting corny one liners.



In perhaps the greatest (Arnold movie anyway) movie ever made, "the Last Action Hero," Arnold told Claudius he made a "Big Mistake." Right now, Netflix is making a big mistake. The Christian Science Monitor thinks Netflix is creating Qwikster just to sell it. Again, Big Mistake.


America is not ready for streaming, and may remain unready for decades to come. Streaming requires cheap and easy bandwidth, which in turn requires a lot fat, high-capacity connections to the average consumer, already paid for and competing with other connections to offer low cost connectivity. Most internet service providers have usage caps, that impose fairly high fees past certain amounts of downloaded data. Heavy streaming of movies will blow past those caps and make the cost of connecting to the internet very pricey. That's a dubious proposition when people are buying cable packages without ESPN to save $30 to $40 a month.

America is a big, spread out country. Unlike mostly urban places where Netflix has expanded (Canada, Argentina, South Korea), most people in America still live in spread out suburbs. It will take a long time for high speed internet to be built out to those areas, and even longer for the data pipes to be fully paid for, and face competing connectivity offerings. Yes Amazon, and Google, and other people are thinking of offering their own data plans, but let us be realistic. Are they able to cover people in suburban Dallas, Phoenix, Atlanta, Chicago, and St. Louis? Plus everywhere in between?

Then too, Netflix faces extremely high costs in signing content deals for streaming. While Netflix can simply go out and buy DVDs if it has to, and has done so (as has Redbox), for a fixed and limited cost, and rent those discs out, streaming the content requires very pricey arrangements with content providers. Who having rapidly diminished revenue streams from TV sales, DVD sales and rentals, no real bump from Blu-Ray, and not much from global ticket sales or 3-D, are not in the mood to do anything but raise prices or build their own streaming center. [This is short-sighted, and guarantees piracy the way the lack of Itunes in the fragmented, Napster era guaranteed widespread music piracy, but that is another story.] Hollywood needs to make money, and they figure on doing it through streaming one way or another.

Meanwhile, those people wanting high definition video, or 3-D (for those who have it) will find Blu-Ray discs far more friendly. You can stop it and watch when you want, there is no stuttering or jitter on limited bandwidth networks, no pricey bandwidth cap fees, and the family can watch as much as it wants before returning the disc.

Yes, the troubles with the Post Office make the costs of the physical disk market potentially higher, but far lower than the endlessly increasing streaming. In a far-flung nation like the United States, the advantage of delivering entertainment on a physical disk still outweighs that of a network.

Yes this is the old "floppy net" or "sneaker net" way of moving files around, on a physical disk hand-carried to device that can read them. In this case, not computer files but DVD and Blu-Ray discs. This business model still works, generates a lot of cash, and will for quite some time.

Reed Hastings is still living in the mini-dot-com boom. When Facebook and Groupon were valued at billions despite not turning a profit at all, apparently. People don't have the money, to spend on pricey streaming plans. No matter how convenient they are, business-wise, requiring almost no people. Hastings can obviously see, "hey no mailing centers, no people opening and sealing envelopes, very little in the way of employees, hey cost savings." That's diving for nickels and dimes and ignoring dollars on the table. Anyone can open a streaming business, heck why wouldn't content owners go with Hulu, many of which are still partners in the deal, or Amazon, or Apple, or Microsoft, or any number of partners who can give them a better deal?

Meanwhile Netflix already has loyal customers, who have liked and used the DVD by mail rental service because of its cheap price and wide selection. To get into that business requires opening up and training employees to operate mailing centers, regionally. It requires lots of publicity and marketing. Netflix has a lot of expertise running their mailing centers, which are the core of their business. None at all really running streaming which places like Amazon, Apple, Microsoft, and Hulu know a lot better than Netflix.

Sometimes nobody here can play the game, as Casey Stengel said of the hapless Mets. Or, "Big Mistake." Maybe even, "Not to be!"