Virtual DVDs, Revisited

Bennett Haselton writes: "In March I asked why Netflix doesn't offer their rental DVD service in 'virtual DVD' form -- where you can 'check out' a fixed number of 'virtual DVDs' per month, just as you would with their physical DVDs by mail, but by accessing the 'virtual DVDs' in streaming format so that you could watch them on a phone or a tablet or a laptop without a DVD drive. My argument was that this is an interesting, non-trivial question, because it seems Netflix and (by proxy) the studios are leaving cash on the table by not offering this as an option to DVD-challenged users. I thought some commenters' responses raised questions that were worth delving into further." Read on for the rest of Bennett's thoughts.

This isn't a silly wish-fulfillment question like "Why doesn't Papa John's give pizzas away for free?" or "Why doesn't Gmail come with more free storage space?" This is about why Netflix and the studios won't take our money for something they could legally provide -- the exact same service that they provide for regular DVDs, but in streaming virtual-DVD form. In other words, consider Bob who wants to pay Netflix $15 a month for their standard DVD-rental service, watching up to 10-20 movies per month for the flat monthly fee -- but he only wants to watch them on a phone or tablet. A profit-seeking company, with the rights to provide the movies in any format, would offer Bob that deal. But they don't offer that option, so Netflix and the studios get nothing, and Bob probably figures out how to pirate movies for free instead. Why would a profit-maximizing company turn down the opportunity to take Bob's money? If the free market never obstructs deals which are a win-win for everybody, why doesn't that happen here?

Some quick responses: A few users said that they wouldn't want to switch from DVDs to "virtual DVDs" even if they could, since they prefer regular DVDs because they have limited bandwidth or Internet access, or their main TV was hooked up to a DVD player but not an Internet streaming device, etc. So to clarify, what I was asking is why Netflix doesn't offer the option of checking out virtual DVDs instead of real ones. So of course anyone who preferred regular DVDs could still get those, but you would have the option of having streaming "virtual DVDs" instead of (or at the same time as) the regular DVDs mailed to your house.

A couple of people argued that the real difference is because of the first sale doctrine -- once Netflix has bought a copy of the DVD, it can do whatever it wants with the DVD, including renting it to customers an unlimited number of times, without re-negotiating the rights with the studio. On the other hand, if Netflix wants to stream a movie to its users, it has to obtain the studio's permission, which could come with any number of restrictions (Netflix streaming is geographically limited to U.S. users) and could be revoked at any time. Hence, no virtual DVDs.

Unfortunately, that explanation doesn't work because Netflix generally acquires DVDs from studios as part of a cooperative agreement, not because once Netflix has the DVDs "they can do anything they want and the studios can't stop them". And any time Netflix acquires a DVD from the studio as part of a cooperative agreement, it really doesn't matter what the pricing agreement is between them, you are still left with the non-trivial question: Why don't they just add in the potential customers of "virtual DVDs", and then they would have more money to divide up all around?

Suppose the studio sells the DVD to Netflix for a flat fee of $50. Netflix pays this much because they expect enough users to check out that DVD, that the DVD will be responsible for bringing in an average of $60 worth of users' membership fees. Now, Netflix knows that if they bought the rights to a "virtual DVD" -- which could only be "checked out" to one user at a time -- they would be able to make $66 over the lifetime of a that virtual DVD, since they'd be able to make slightly more by including the users who didn't want to deal with regular DVDs. So they offer the studio $55 to acquire a single "virtual DVD", which can only be "checked out" to one user at a time, but which they have the rights to "check out" to people forever. The studio makes $55 instead of $50, Netflix makes a net profit of $11 instead of $10, and a few additional users get to check out a movie that they otherwise wouldn't have. Everybody should be happy with this change -- which makes it an interesting question as to why it doesn't happen.

Or, suppose that the studio negotiates a different royalty-based deal with Netflix: the studio gives Netflix the DVD, and Netflix pays them 50 cents each time the DVD is mailed to a user and returned. Netflix likes that deal because if the user is paying $15/month to rent an average of 20 movies per month, that's still 75 cents for Netflix for each DVD mailing, leaving them with 25 cents left over after paying the studio's royalty. But Netflix figures that if they offered a virtual DVD plan -- 20 "virtual DVD" rentals per month, for the same $15 -- they could rope in a few new paying users that they didn't have before, taking $15 per month from each user, paying $10 to the studios (50 cents royalty each time a "virtual DVD" is "checked out"), and having $5 left over. Plus of course the studios get $10 from each user that they weren't getting before. Again, win-win for everyone, so a bit of a mystery why they don't do it.

The moral of these two examples is that as long as the DVDs are provided as a cooperative agreement between Netflix and the studios, there is no simple explanation for why they don't offer virtual DVDs as an option. It doesn't matter whether the DVDs are bought by Netflix for a one-time fee, or rented by the month, or paid for in royalties based on the number of times that they are rented out, or paid for in royalties based on the number of days each user keeps them before mailing it back -- in all cases, virtual DVDs would bring in some additional money, which could be divided between Netflix and the studios so that they both come out ahead.

In rare cases the DVDs are actually not acquired as part of a cooperative agreement -- in 2012, Disney refused to provide copies of John Carter to Netflix, so Netflix simply went out and bought copies at retail and mailed those copies to their subscribers. In that case, of course, it's trivially true that Netflix could not provide "virtual DVDs" of John Carter to their users, because it would have been illegal without Disney's permission. But in the vast majority of cases where Netflix is providing DVDs to users with the studio's knowledge and cooperation, that's where it's puzzling that virtual DVDs are not an option.

In the last article I ended up concluding that the reason was price discrimination -- whereby a company provides two different tiers of service, at about the same cost to themselves, but where the cheaper version of the service comes with some inconvenience that is deliberately put in place to steer less thrifty shoppers to the more expensive version. In other words, maybe DVDs are inconvenient on purpose, to steer users towards spending $2-$5 to download a digital copy of each movie they want to watch, instead of watching 20 movies per month for $15. You can get cheap movies, but you have to be willing to deal with clunky DVDs. (The irony, of course, being that DVDs originally became popular because they were so much more convenient than their VHS tape predecessors.)

I'm not sure if my non-obvious answer is right. However I think the "obvious answers" are wrong.

Well, I'll manage. In 2013 I wrote about low-tech tablet hacks including #2, using C-clamps to mount a shelf to another bookshelf, and then attach a tablet holder to hold a tablet above my head while watching movies in bed, which is still to this day the most comfortable way I've ever found to watch a movie. It turns out it works for a portable DVD player as well, but for all the people who moaned at the last pictures going "When did Slashdot turn into Pinterest?", I didn't bother taking a picture this time. Just picture something that's such a hacky solution it looks almost steampunk, but these days, so does a portable DVD player.