What Netflix CEO Reed Hastings Learned from the iPhone

Simplicity is at the core of Netflix (NASDAQ: NFLX  ) . At least, it used to be. JPMorgan analyst Doug Anmuth was keen to spot that the phrase "simplicity is at our core" was removed in recent months from the company's long-term view. Hastings responded that he took a lesson from Apple (NASDAQ: AAPL  ) with a little help from his friend.

Can a less-simple Netflix continue to grow in the face of competition from simple offerings from Amazon.com (NASDAQ: AMZN  ) and Outerwall (NASDAQ: OUTR  ) ?


Source: Netflix

An Apple genius
When Apple released the iPhone its design was simple (one button), its interface was simple (touch anywhere), and its capabilities were simple (whatever Apple said you could do with it.) Apple made the device so simple that a three-year-old could understand it.

Apple unlocked a lot of value when it opened up the iPhone to developers and created the App Store, though. In 2013, Apple generated $10 billion from the App Store.

On Netflix's conference call, Hastings said that an iPhone without apps is simpler, but it's not better. Instead, he's shifting his focus to simplicity as an input -- its basic product of video streaming. Then the company can match functionality with consumers at different price points in much the same way that the iPhone does through tiered products -- 5s, 5c, 4s -- and then uses the App Store to add further functionality.

This transition to tiered pricing started last April when the company introduced a premium service for $11.99 that allowed customers to stream to four separate devices simultaneously. More recently, the company started testing a $6.99 price point and a $9.99 price point; each of these new price points features varying levels of functionality. In his letter to shareholders, Hastings said the company hopes to overhaul its pricing to a "good, better, best" offering.

Not too complex
Hastings hasn't diverged too much from his goal of simplicity, however. When asked about adding pre-roll advertising before videos begin playing, he said the company has no plans to go toward advertising. It doesn't fit into the company's model of giving the customer complete control over his viewing experience. Additionally, Chief Content Officer Ted Sarandos said the rights to add advertising cost more.

Additionally, the tiered pricing plans will not offer different content, just different functionality. Current content licensing won't allow the company to provide certain content to some subscribers and not from others. With competitors like Amazon and Redbox bidding for exclusive rights against Netflix, part of the sway for Netflix is that it has significantly more subscribers. Tiered content takes away that advantage.

Potential price hike
The last time Netflix tried to raise prices, it faced some serious backlash and a significant sell-off in its stock. Of course, that was three years and millions of subscribers ago. To ease investors and subscribers, Hastings said in his letter to shareholders that "existing members would get generous grandfathering."

Still, efforts to increase prices could be an opportunity for Amazon Prime and Redbox Instant to add new subscribers that may have otherwise chosen to subscribe to Netflix. Amazon already undercut Netflix on pricing with its $80-per-year Prime service, and although a low-tier offer from Netflix could offer a competitive price, consumers may see more value in Amazon's offering.

Meanwhile, Redbox Instant offers the combination of rentals from Redbox kiosks with video streaming, undercutting the price of a dual membership to Netflix's streaming and DVD-by-mail service. Although Redbox Instant's catalog doesn't measure up to Netflix's, the service is a relative newcomer and has the backing of telecom giant Verizon (which has shown an increased interest in video in recent months.)

Stream different
Netflix wouldn't be the first company to copy Apple in some form. With 33 million domestic subscribers and hopes of doubling that in the long term, Netflix may be keying on tiered pricing for future growth.

With significantly more competition than the last time the company tried to raise prices, however, Netflix may be opening the door for other streaming video services to capture more subscribers. Of course, Apple wasn't afraid to let its competitors take the bulk of the smartphone market, and it's worked out fine for the company so far.

The future of entertainment is within your reach
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple.


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