Sometimes, Netflix tweets an announcement and people go crazy. (Case in point.) Other times, Netflix makes enormous changes, and people don't really notice

Take the huge change that Netflix apparently made recently that could save it tens or hundreds of millions of dollars, but that could also make things less convenient for new subscribers in the process. 

It's a bold move, maybe risky -- but if it works, it's brilliant. 

Here's the explanation, the giant financial incentive, and the reason why it's always so fun and instructive to watch how Netflix rolls things out.

The Apple tax

Quick background: A huge number of Netflix subscribers actually subscribe to Netflix via iTunes. In fact, as I write this, Netflix has the No. 3 highest grossing app for iPhone.

For most companies that would be great news, but for Netflix it's a case of mixed feelings. That's because Apple takes a nice big cut of the subscriber revenue via iTunes: 30 percent of the gross for the first year, and 15 percent for later years.

Last year, an analyst quoted by TechCrunch estimated, Netflix grossed about $853 million from subscribers who came in through iTunes, which works out to an estimated "Apple tax" of $256 million.

Enough is enough, Netflix basically said, and made its big change.

As of sometime in the last month or so (more on that in a second), paying via iTunes isn't an option for new Netflix subscribers anymore. Instead, they're now prompted to download and subscribe via the Netflix app--and that cuts Apple out of its subscription commission completely.

A worldwide rollout

Netflix actually stopped allowing new Google Play subscriptions last year, and apparently began weaning itself off iTunes for new subscribers on a test basis in some overseas markets during summer 2018.

It's tough to know for sure when exactly Netflix made the no-more-iTunes decision for the United States. The company never made an official announcement as far as I can tell, but it did confirm this change to a website just before New Year's Day.

A salute goes to writer Manish Singh, who figured this out for VentureBeat. Netflix apparently wouldn't confirm when the change happened, so Singh just asked customer support, and a representative told him it happened sometime in late November.

(Interesting FAQ note: If you search for "iTunes" within Netflix's online help, the first options that come up all have to do with either canceling iTunes billing or presumably switching to paying directly through Netflix.)

The teeth in FAANG

The five big tech companies -- Facebook, Amazon, Apple, Netflix, and Google (really Alphabet now) -- are often grouped together with the acronym FAANG as an investment strategy, or just to describe that part of the economy together.

So really, this is a battle among FAANG giants: Netflix vs. Apple, and to a lesser extent Google.

It's worth nothing that while Netflix is a big company (maybe $150 billion or so), it's much smaller than Google and Alphabet. But it is one of the few companies big enough to put up a challenge.

Even though we're talking only about new subscribers, that's still millions of new people per month. And the only way this works for Netflix is if it has enough demand across platforms regardless of people finding it via iTunes. 

It has to know that in the long term, it can do the math, and be sure that even if it lost some subscribers by not being available via iTunes, it's still coming out ahead by not having to pay the Apple tax. That makes continuing to pump up demand so key.

Maybe that's part of why Netflix loves to announce things like the fact that 45 million people watched Bird Box, or 20 million watched The Christmas Chronicles.  

But as for backend changes that affect millions of subscribers and upend the relationship among big tech companies? On that kind of stuff, Netflix likes to keep it a little closer.

Published on: Jan 2, 2019
Like this column? Sign up to subscribe to email alerts and you'll never miss a post.