The Future of Netflix Is the Future of Online Entertainment: Higher Prices

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Today's announcement from Netflix that the company is slashing its subscriber projections by one million sent its stock into a tailspin, finishing down 18 percent. Even if the news isn't worse than it appears, the story is certainly deeper than it appears.

This was Netflix's third big surprise in the last year. In March, the company jolted Hollywood when it announced that it bought (for a rumored $100 million) exclusive licensing for David Fincher's political drama "House of Cards." Then in June, the company pulled the rug out from under subscribers by announcing that it was effectively raising the price of streaming movies and renting DVDs.

Those two surprise announcements share a common motivation: More competition and higher prices.

Rewind a few touches. In 2000, Netflix claimed about 200,000 U.S. subscribers. By 2010, it boasted about 23 million users. Today it has as many subscribers as any cable provider in the country (albeit at a much lower cost) and it commands a greater share of primetime bandwidth than any other website. It's an enormous success story built on simple principle: Making deals with studios to distribute their entertainment at a low cost.

But success stories have a way of getting out. Amazon, Apple, Google, Hulu and other companies are itching to make deals with studios to distribute their movies and TV shows. Before this competition, Netflix could name its price. With competition, the studios will name their own price. As a result, the cost of streaming studio-owned work will rise -- not just for Netflix users, but for everybody.*

Netflix is responding to this new reality in two ways. First, it's thinking inside the box by dealing with higher distribution by charging higher prices. Second, it's thinking outside the box by licensing quality shows directly to Netflix. A good way to avoid paying more for other people's content is to preempt them and buy the rights yourself. If Netflix can become not only a premier destination for movie buffs but also a premiere destination for television producers, it will have solved its studio crisis by reinventing cable.

You're thinking: I don't care about the reinvention of cable, I just want my old Netflix price. So do we all, but you're not going to get it. We've been living in a dreamworld of cheap entertainment and unless these companies competing for licensing rights decide to buy each other or establish a cartel, studios are going to charge higher prices because they realize there is insanely high demand for their stuff online. This isn't boneheaded business strategy, on anybody's part. It's just business.

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*I just hope the same thing doesn't happen with Spotify. Although I'm pessimistic that $9 a month for unlimited music is the kind of price that can withstand more big-name music streamers. Spotify might well be the next Netflix.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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