Netflix's Price Hikes Are an Unfortunate Side Effect of Ecosystem Lock-In

Popular on-demand video streaming service Netflix's announcement that it's raising prices for U.S. subscribers should come as no surprise. As the company continues to double down on original content and fend off competition from the likes of Hulu, Amazon, YouTube and Disney+, the rate hikes, the biggest since launching its streaming service 12 years ago, are a sign that getting "locked in" to a service, regardless of the price tag, can be detrimental to the consumers in the long run.

Ecosystem lock-in has long been the classic strategy adopted by companies to retain users within their platforms. Whether be it by offering their services for free, or by undercutting rivals by offering them at a lower price, tech companies in particular have laid a groundwork where choosing a platform is tantamount to pledging allegiance to a single's company's products. It's convenient, but at what cost?

This lock-in is intentional by design: not only does it encourage customer loyalty (willingly or otherwise, because they have no choice but to), the energy barrier for a consumer to switch to a competitor is so high that it gives each company room to manoeuvre and gain market share. There is a reason why they are called "walled gardens."

The interesting thing here is that Netflix didn't start off as one. Originally launched as a DVD rental service, it astutely shifted gears to online streaming, but not before realising that the key to media dominance was a vast library of original content. The tectonic shift in recent years has led to it cutting back on licensing third-party content (which can be expensive) in favour of producing its own original shows.

Netflix stock soared 7 percent after news of price revision broke

The result? A walled garden with a huge catalog of exclusive titles not available elsewhere and a steadily shrinking movie library (the streaming giant has removed more than 2,700 movies over the period 2010 to 2018), but also an increased potential to bring in a greater number of subscribers over time. 

While there is no doubt that replacing cable TV's walled gardens with newer, different walled gardens has led to fractured content availability, confusing subscribers (why is Bird Box only on Netflix, or Game of Thrones an HBO exclusive?), even the threat of driving frustrated customers back to piracy hasn't had a negative impact. Why? Once companies grow big, it's that much more difficult for their market share to shrink, and every time they differentiate, they tend to grab a few more people along the way.

By effectively hooking users to their "walled gardens", the monopolisation has not only given them room to experiment - removing titles as they see fit (Netflix employs data mining to discern viewing patterns) or jacking up prices - they can do so with little or no cost to their bottom lines. Amazon, for instance, raised the price of its Prime subscription service from $99 to $119 last May, and the rate increase had surprisingly little effect on its paying customers, who were more than happy to shell out the extra $20 out of their pockets for the convenience the service offered them.

In fact, a recent report published by Waterstone Management Group, a Chicago-based management consulting firm, found that 84 percent of Americans underestimate how much they spend on subscription services each month, indicating how most users are either blissfully unaware or don't even care too much to begin with, thereby making subscriptions a lucrative business model for companies like Netflix, Amazon and others.

So yes, subscriptions are the way to go, but with the inevitable crowding of the streaming market, it's hard not to envision a future where users have to pay for countless streaming services if they actually want to access all of their favourite TV shows and movies. With Walt Disney's Disney+ set to launch later this year (Disney is also an investor in Hulu), and Apple readying to unveil its own, the streaming landscape is all set to become the new battleground. Netflix's efforts, when viewed in this context, are nothing if not strategic and part of a larger ploy to lock in its users before they jump ship to rivals.