Wednesday, December 20, 2006

Why I Am Breaking Up With Netflix
I was a die-hard Netflix fan. Apart from when I lived in Canada or Europe, I’ve been a Netflix customer for the last five years. There is a very tanglible tingle when a Netflix movie arrives in the mail, packaged up in its red envelope. When I lived in Canada I missed Netflix so much that I co-founded and ran a Canadian copycat service called, that continues to do well in that market.

I learned a lot about how the business works. The biggest variable cost is the two-way postage. And so the best customers are the ones that don’t return movies that often. For the business to work, the average has to be less than five movies per customer per month. If customers return movies too quickly, your only real choice is to slow down their shipments. Netflix and all of the competing services have complicated algorithms that add a day or two here and there to the “received date” when customers return DVDs. One way or another, high velocity customers are slowed down. And if they leave, that’s fine. They weren’t profitable anyway.

I understand the rules, and the deal was still worth it. $18/month for three or four movies. But the bigger issue is that I have a mix of new releases and classics in my queue. Netflix would always (always) send the classics and never the new releases, regardless of how I managed the list. Again, that’s just their algorithm kicking in and maximizing my profitability as a customer.

But that opened the door to Blockbuster. I still go there on Tuesdays when the new releases come out to get the new stuff that Netflix won’t send. Netflix is a great service for library titles, and a terrible service for new releases. Netflix made the mistake of being quite happy with me going into Blockbuster every week to get the movies I couldn’t get at Netflix.

Blockbuster’s Total Access Service

Blockbuster has had a service that competes with Netflix for some time. I tried the service out in 2005. The main advantage was that they gave two free in store movie rental coupons per month with the subscription (it is now just one coupon). But the service felt slower than Netflix, and I cancelled the subscription.

But recently Blockbuster changed the service in a way that can really hurt Netflix. Movies received by mail can be returned directly at any Blockbuster store. You get a free rental on the spot, and Blockbuster still sends out the next movie in your queue. And yesterday they announced that the monthly coupon for a free rental can be used for movies OR video games.

This is all combined with the fact that Blockbuster terminated its late fees a while back, meaning that rentals can be kept at least a week before you have to deal with them charging your credit card.

So I cancelled Netflix and signed up with Blockbuster. I return mailed DVDs to the store, where I can get the new releases for free. And the mail service is great for the library titles that aren’t in high demand.