Companies absolutely love the subscription model. First, they hook you on to their product. Next, after there isn’t enough growth in subscribers, they increase their subscription rate. I’ve seen this played out many times in the recent past in several industries. It is akin to the guy on the corner selling illegal drugs. First, they get you hooked on it and then they charge you higher and higher rates.
If Netflix does raise rates, I don’t think they will be successful for very long for several reasons.
- They tried to do so several years ago and it flopped.
- Technology cycles are getting progressively faster. Something that is “in” today can quickly get bypassed with a newer technology. I always use records as an example. Records were in for decades. Cassette’s life was much shorter and CD’s were a “flash in the pan”.
- With technology getting cheaper and cheaper, competition is growing fiercer all the time at an increasing rate. Economically, more businesses in the on-line video segment will continue to be created until the profitability is “commoditized”. I could see a future of high school kids setting up their own on-line video business out of their bedroom. Who needs actors? VR is close to lifelike now. You can create your own productions. You laugh, but the big mainframe companies laughed at Dell and Jobs when they came out of their garages with the PC. Who had the last laugh (surely not IBM!).
Economically, businesses become commoditized when their barriers to entry are few and weak. Michael Porter discusses this extensively in his acclaimed book “Competitive Strategy”. With technology getting cheaper and the duration of technology cycles shortening remarkably, once difficult barriers are breaking down faster.
Surgeries are being done with technology. Think of the Da Vinci Surgical System. Driving will be done by self-driving cars. Lots of changes are coming on fast.
It is vitally important for businesses to constantly be looking to improve the operational aspects of their businesses, often with technology. This is why the stock buyback craze alludes me. Instead of building operational business capabilities with capital expenditures, businesses are choosing to engage in financial re-engineering that will boost their bottom line. That is short-term smart, but long-term dumb.
Strong businesses are ALWAYS investing in their operational capabilities – constant improvement. Outstanding individuals are much the same. I tell my kids that college isn’t the end of their education – only the beginning. If you’re not continually learning, your career and financial position are at risk!
This is why I believe the benefits of Netflix raising their rates will be short lived. ….and shorter… and shorter. The tide will eventually change where it will be “in vogue” to retain customers by not raising rates, but giving more value.
Be safe, be smart, be prepared, be well read and be successful!
