One of my favorite classes in college was macro economics even though I barely passed a single exam. It was a perfect example of thinking you know what you’re doing, but you really don’t. One concept that I did correctly understand was the idea of Substitute Goods. As I look at how the Netflix story plays out, I can’t help but think about my economics class.
First, Netflix announced they would raise their subscription rates starting in September, which alienated a lot of customers including myself. Today in the news we hear that negotiations to continue licensing Starz content broke down, which resulted in their stock taking a hit. No matter what happens in the short-term, Netflix is going to have a tough road ahead as more companies want more money for their content. Whether you’re pushing sitcoms, movies, or articles in a magazine, content always has and always will be king.
In anticipation of the September rate increase I put my subscription on hold and took Blockbuster up on their offer to woo Netflix customers. Now, I am not a Blockbuster fan since they went bankrupt and wouldn’t accept my gift card at their store, but given the cheaper price I thought I would give them a second chance with their Total Access offering. Today, I got my first 2 discs and the verdict… so far so good, which is bad for Netflix. To be fair, while price was a factor, Blockbuster also offers video game rentals and my son is an Xbox addict. These video games can be $50 to buy and get played for a few weeks before they just sit on the shelf. So on my first order, I got (1) movie and (1) Xbox game. While Blockbuster may not have as many movies and their web interface is not as easy to use as Netflix, the video game rental service and the ability to drop off movies in the store (if you can still find one) almost makes this a perfect case of substitute goods.
At the end of the day, I get to see more movies than I would see otherwise with no subscription. I get to save money. I get the same level of convenience. And, I get a son who thinks his dad is the best. In all honesty, I still struggle with cases like Blockbuster and Borders who couldn’t get an online strategy in place quick enough to decimate the competition. But it goes to show you that don’t always assume the strongest will win, and don’t always assume that a fallen hero won’t ever rise again.
So what’s the lesson?
Lesson 1 – When changing price or service, make sure you really understand your customers’ alternatives. Is there something compelling that your competitor might offer that makes up for the product you compete head-to-head on? In my case it was video games. Netflix has a lot of smart people who I’m sure ran the numbers to account for a certain percentage of lost subscriptions. So, like Netflix, always do the math and understand what the impact to the bottom line could be.
Lesson 2 – Blockbuster will need to keep fighting tooth and nail to get new movies and streaming deals as well. If they don’t then I will switch. Beware of switching costs. The switching costs are so low for customers in this model it is scary. I signed up online for Blockbuster Total Access over the weekend and had my first discs in 3 days. The only finger I lifted was to get my wallet.
Lesson 3 – MOST IMPORTANT to readers of this blog. A great web experience doesn’t mean anything without the right price and the right products and services. Before investing more in your web site, make sure you’re polling your customers to ensure you’re not missing the basics. In Netflix and Blockbuster’s case they need to keep feeding the insatiable appetite of consumers wanting every movie available at anytime through any format (DVD or streaming). Oh, and don’t charge a lot.
It’s tough running a business!



