In its earnings call this week, Netflix acknowledged what has seemed obvious for a few weeks now— people are ditching its service because the company hiked its prices. Netflix used to charge $10 a month for its cheapest streaming and DVD plan. On July 12, it announced it was raising the price of that combo plan to $16, while the price of its $8 streaming-only plan stayed the same. Netflix says the resulting outcry pushed the company's quarterly revenues slightly below what analysts had been expecting. Over the next few months, it expects to add new subscribers at a slower pace than it did last year.
Investors are bummed by the news—Netflix shares are trading substantially below their level before the price hike. But I think Netflix backers should be more positive, because the company has helped bring about a fundamental, long-term change in the movie business, one that will certainly help its bottom line in the future: Piracy is on the downswing. Now that we all know what a great legal online video service looks like, people are going to move away from getting stuff the illegal way.
I say this as a reformed pirate. A couple years ago, I confessed that I was an unrepentant BitTorrenter—I downloaded movies and TV shows using peer-to-peer file-sharing, and I had the time of my life doing so. "I sometimes feel bad about my plundering ways," I wrote—but not enough to make me stop.
At the time, pilfering movies was a whole lot easier than watching them legally. Netflix's streaming catalog had a tiny number of titles, most of them not to my liking. Apple's iTunes rental plan had more titles, but too many restrictions (paying $4 for just 24 hours of access to a movie was a bad deal). I outlined what I called the perfect online streaming service—I wanted a plan that had a library as extensive as Netflix's DVD plan, but which allowed for unlimited viewing—and I promised to pay as much as $40 a month for it. Netflix's instant watching service isn't anything close to that, of course. But in the last year it has improved its selection and accessibility (you can now get it on pretty much any device you own) just enough to hit a tipping point. I'm happy to pay $8 a month for not-terrible selection and amazing convenience. And nowadays, I almost never turn to BitTorrent.
I'm not the only one changing my ways. In May, the network management company Sandvine reported that Netflix had overtaken BitTorrent to become the main component of North American Internet traffic. Indeed, BitTorrent's share of traffic declined slightly from last year. This doesn't mean that fewer people are engaging in piracy (the number of file-traders could have increased even as the share of traffic used by file traders declined), and BitTorrent still accounts for the bulk of Internet traffic worldwide. But even if Netflix were to gain very few customers over the next few months, piracy looks like it's on the decline.