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How Netflix’s Stumble Benefits Moviegoers and Advertisers

Posted by on Sep 23, 2011 in Blog, SMG Favs | 0 comments

In July, movie rental industry leader Netflix changed their pricing policy and increased rates, separating their on-demand/streaming and by mail services. This unexpected move outraged customers and led to a 50% drop in stock value.  How does this blunder change the movie watching industry for both consumers and advertisers? 

Netflix developed a following by offering simple and inexpensive movie rentals as an alternative to the rising costs of theater tickets. According to Arbitron research, 51% of adults 18+ have not seen a movie in a theater in the past three months. Meanwhile, during the same time frame, 26% of those surveyed have used Netflix or the other two players in the marketplace, RedBox and How do these companies compare in the now more competitive marketplace?

Each company offers movie watching experiences, but in varying plans and prices. In order to compare each equally, I chose the same movie throughout for the example and used a frequency of five watched movies a month to determine the cost per disc for the monthly plans.

X-Men: First Class opened at the box office on 6/3 and moviegoers shelled out $11 a ticket in order to see it at their local multiplex.  This does not include popcorn, soda, or IMAX.

Three months later, on 9/9, the comic book movie came out on DVD/Blu-Ray exclusively on The former in-store rental giant offers multiple services for their rentals including on-demand/streaming, at a local store, and by mail. Their by mail method is an $8 monthly fee, which comes out to roughly $1.50 a DVD or Blu-Ray. The on-demand rate for this movie is $3 per viewing and an in-store rental is $4.

Meanwhile, Netflix users must wait four weeks in order to get the same movie, and pay $2 a month extra for Blu-Ray discs by mail, for an average of $2 a disc. On the other hand, their on-demand service is an $8 monthly fee for unlimited viewings, and using the same frequency as earlier is $1.50 a viewing.

The other player in the market is RedBox, which offers walk up kiosks for $1 per DVD and $3 per Blu-Ray rental for this particular movie at the same release date as Netflix. With 28,000 locations and no monthly fee or commitment, the Coinstar owned company offers a viable option as well.

The last option for an eager X-Men fan would be to just walk into Best Buy and buy it for $18. 

Each company has competitive edges and disadvantages, but Netflix’s changes increased the competition in the marketplace, benefitting the consumer.

Even though these rental companies are growing in influence due to low cost and ease in use, movie theaters are still the main avenue for advertisers.  Currently Netflix,, and RedBox do not sell advertising before the previews accompanying the movie.  Other streaming services, like Hulu, sell 15-30 second spots to various clientele before each of their videos.  Meanwhile, movie theaters have been increasing their sales in the ad space before the trailers to the same clients.  Their audiences are not distracted, unlike viewers at home with DVR, Mobile, or Internet access, and according to research are more likely to remember the advertiser’s message.

Without leaving the couch, moviegoers can watch the latest X-Men movie for $1.50-$3, walk out to their mailbox for $1.50-$2, drive to the local shopping center for $3-$4, see it in a theater for $11 and own it for $18. However, advertisers can only reach the consumers in one of these scenarios. Maybe Netflix can recoup lost revenue by including a 15 second spot for Coke before each of their on-demand videos. Perhaps can help recover from bankruptcy by including a coupon flier from Pizza Hut in each of their mailings.  While Netflix’s stumble opened up the marketplace for competitors, the advertising potential is already wide open.  Only time will tell the future of this medium.

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