This post started as a rant about how Netflix announced a rather large price hike for Blu-ray disk rentals. Starting in late April, access to Blu-ray disks will cost an additional $5 a month (up from $1/month) on the 4-at-a-time plan. While their timing is simply perfect - I purchased a Blu-ray player about a month ago - Netflix is claiming that the increase is due to the increased cost of Blu-ray disks.
While retail prices for Blu-ray disks are in fact higher, producing a high def disk simply cannot be that much more expensive that producing a DVD. Its more of a matter of new technology being priced higher than older, established technology.
I think the Netflix price increase has to due with the problems inherent with physical media, and is a sign that Blu-ray may be the last mainstream physical video format we see. For the first 11 years or so of its existence, Netflix only had to stock one version of each movie in its catalog: the DVD. Of course, they had multiple copies at each distribution center, but each disk was identical, and it didn’t matter which customer got which physical disk. Bringing in Blu-ray, they must now stock two versions of each title: one DVD, and one Blu-ray. Only customers who request Blu-ray should get that format, everyone else should get DVD. Now, their entire distribution model is split in half - the scalability of all of their systems relied on only have one set of disks per movie. Now, they need to manage two.
Where is this leading? Speeding up adoption of digital distribution! Netflix has a growing collection of movies and other video available for streaming to computer as well as televisions. As of yet, there is no additional charge for this service, and Netflix has seemingly gone out of its way to make it easily accessible. While it started on PCs, streaming is now available on Macs, too. They also have a $100 box to connect to your TV and formed partnerships with companies like TiVo to make Netflix easy to view in the home theater setting. All for “free” with your Netflix subscription.
Digital distribution is much more scalable than having to effectively double physical inventory, and thus, can be offered less expensively.
Digital video distribution still has some problems, of course. Netflix doesn’t currently offer offline access - their offering is streaming only - not useful on an airplane, for example. Competitors like Apple offer some movies for rental in digital format, but come at a higher price and some serious restrictions (only a 24 hour viewing window) Of course, none offer the same quality as Blu-ray - not even the “HD” offerings on iTunes. I suspect this will change as bandwidth becomes cheaper. Considering my home cable modem gives me the same bandwidth that just a few years ago would have required a T3 costing thousands per month, this will only continue to get better. In the meantime, Netflix will collect a few extra bucks from some of us - and hopefully invest further in their digital offerings.