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Netflix's Biggest Problem: Movie and Television Studios

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The only thing that seems to be as popular as the Occupy Movement these days is bashing Netflix. A lot of this upset is warranted in how they increased prices 60%, announced splitting the company into two separate services for streaming video and DVDs, and backtracked on the split with the announcement that Qwikster was dead, which has now led to a 75% decline in their stock from its highest value this year and 800,000 subscribers abandoning Netflix.

Though the uproar Netflix subscribers (including myself) have expressed is warranted based on these facts, there is one big issue that fills out a clearer picture of why these changes came about. The main challenge for Netflix is that they have built a popular distribution channel, but they are dependent on content owned by television and movie studios. This is why the New Release section of Netflix's streaming service is filled with movies and shows that you've never heard of and that you aren't interested in watching.

The studios are still white-knuckling their way through creating pricing models for the new ways we consume digital content in the same poor way that record companies have reacted to music becoming a digital product. As Bob Lefsetz describes it, "The content industries want to jet us back to the past, they want us to live in the last century when we're already in the second decade of the twenty first."

We can only hope that the television and movie studios figure out a sustainable and scalable way to make streaming new movies and TV shows profitable soon. If they don't, then Netflix will continue to bleed customers who don't want to pay for unpopular movies and shows, Redbox $1 movie rentals will skyrocket, and Hulu or Amazon Instant Video may be to Netflix what Google is to Yahoo: the second company to come to the party, but the one that eats all the cake.