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Networks and Netflix

          Recently, Netflix CEO Reed Hastings announced that Netflix will be branching into two separate companies. Netflix will now consist solely of the instant streaming online, and the new company Qwikster will handle the DVD mailing aspect of the current Netflix. This split, coupled with a price increase, has left many consumers unhappy and angry. Now, consumers are left with a decision: stay with Netflix/Qwikster or switch to other possibly cheaper methods of watching videos?

          With so many possible options out there, there are numerous methods and companies customers can use to watch the television shows or movies they desire. There is the increasingly popular Redbox, online streaming websites, and countless others. The question becomes which method/company gives each consumer what he or she wants for the lowest price and greatest convenience? Each consumer must consider the options based on which method has the least payoffs and the greatest benefits. Using a payoff matrix and game theory, a customer can determine which option is best, based on price or other components deemed important.

          This dilemma can also be viewed from the business side. On top of the split of Netflix into Netflix and Qwikster, Hastings also announced a price increase. Especially for consumers looking to purchase instant streaming videos along with DVDs by mail, this is a significant increase in price for a significant decrease in convenience. Now, people must use two separate websites to manage their queues; one for ordering DVDs by mail, and one for online streaming. This price increase has already cause Netflix to lose about one million subscribers. Is the tradeoff worth it? Will the benefits of splitting the company in order to specialize and increasing the prices outweigh the losses? This is a question that can be answered by looking at a payoff matrix and estimating how consumers will act in response to these changes. The company supports their decision by saying the up and coming popularity of instant streaming requires more attention and by splitting Netflix into Netflix and Qwikster, the required attention can be given to each to make them each the best. Consumers that are content with the current situation and prices are not accepting the change with open arms. It will be interesting to see in the future as these changes actually take place how consumers will respond and then if Netflix will choose to back down on the price increase or still stand with the current decision.


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September 2011