Netflix and fixed costs

My usual explanation for Netflix's absence from the New Zealand market has been rights and licensing issues.

My usual explanation for Netflix's absence from the New Zealand market has been rights and licensing issues. The fixed costs of getting things sorted out for a small market mean that the game's not worth the candle for Netflix, so they're not here.

As we always tackle the big issues in the Canterbury econ department staff lunchroom, we yesterday argued about Netflix. And Stephen Hickson raised a reasonable counter to my fixed cost argument around navigating rights: iTunes sells movies in New Zealand. If iTunes could handle the fixed costs of dealing in a small market, why couldn't Netflix?

So I checked and it is indeed true that you can download a lot of movies on the New Zealand version of iTunes. But they're expensive. A standard rental is around $8. Purchasing a film is $25. Last I'd checked, Netflix charged $9 per month for all-you-can-eat downloading of anything from their base of movies. Maybe it's since changed: I'd have to circumvent geoblocking to be able to tell.*

But if the iTunes standard model is really expensive access to recent films, and the Netflix model is really cheap access to a great big pile of movies, then it's entirely plausible for fixed costs and rights issues to keep Netflix out while iTunes is able to make a go of it. And where Sky has a lot of rights sewn up, they might care rather more about competition from a Netflix style model than about competition from the New Zealand version of iTunes which seems more expensive than either the video rental store or buying DVDs.

For now, then, I'm sticking with my story around fixed costs of navigating rights arrangements. Netflix needs rights to a pile of lower-value films to make their model work, and negotiating for each of those for a small market like New Zealand just isn't going to be worthwhile.

A lot of the high demanders would already have simply circumvented geoblocking (it really isn't hard) and subscribed that way. While Netflix likely gets better margins out of the low demanders - the ones who pay and who download little - it likely just makes more sense for them to take grey market subscription payments from Kiwis who've ungeoblocked than to sort out the rights messes to get the tail of low demanders in a small market.

* Wanting to verify that circumventing geoblocking was easy, I installed a a free piece of software that allows you to use Netflix as though you are an American. It was a little buggy, but I was up and running in a couple of minutes.

Dr Eric Crampton is a senior lecturer in economics at the University of Canterbury. He blogs at Offsetting Behaviour.
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