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Comment by alex_smart | Hacker News Reader

>The marginal cost for a new subscriber is practically zero, so there should be no price increase caused by a shortage.

Yeah, I don't think that that argument works at all. The price does not increase due to "shortage", it increases due to an increase in consumers' willingness to pay. Going by the Netflix example, if Netflix realizes that not too many people will cancel their subscriptions if they were to increase the price by, say, 1 dollar, they would certainly increase the price.

Consumers' WTP is the reason why digital goods are priced differently in different markets. Many digital goods are sold for much cheaper in India compared to developed countries because the Indian market is much more price sensitive. For instance, Netflix costs only about half as much in India as it does in America.

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It's also debatable that there are no costs associated with digital goods. If suddenly Netflix had a surge in subscribers and they doubled them over a short period of time, they'd have to invest in infrastructure to support the extra demand. That would cost them in hardware and human resoursces to handle the extra demand. But yeah, digital services have a better situation at meeting demand than physical goods of which, after the produced amount sells out, you have to wait for more to be manufactured, delivered, etc.

But the surge in revenue from doubling subscribers would (way) more than cover any costs in infrastructure spending. This would not drive any increase in subscription cost, which is purely governed by the competition and content acquisition costs, paired with whatever magic number the major investors/board decides is an acceptable profit margin.

A doubling in subscribers might need a trippling in customer service agents (especially if the new customers are not as good at tech and need more help, which goes along with being a late adopter or if the service quality drops because of the presumed doubled usage, and there's more service requests as a result).

If the doubled subscribers requires doubling the number of Netflix OpenConnect CDN boxes, that would mean current capex, and while the additional revenue might eventually pay for it, there might need to be borrowing costs to get the equipment sooner rather than later. Also, right now is a tricky time to get lots more hardware, so a 2021 node might cost more than a 2020 node, even if they have the same capacity.

All that said, without looking at their investor reports, I suspect they have some margin and cash on hand to make things work and mostly profit. They probably also have a target for spare CDN node capacity, because there's some pretty high variability of peak load on new releases and ISP install lead time can be super long. Also, they do a lot of efficiency work to make sure they can push as much traffic as possible from their nodes.

Yes... those Netflix customer service agents

The infrastructure is physical though, and thus is of limited supply. If you really had to double your capacity quickly, you'd have to take the computing power from someone else, at a cost.

Every digital value chain ends up on something physical.

You have never tried to dig a new or more cables under the sidewalk or into the ocean, do you? What you kids think is "free" is in fact heavily subsidized by other people's money.

Very few fiber optic systems are run at capacity.

Upgrading bandwidth is therefore a matter of new optics and router cards, not new cables.

Furthermore new subsea cables bring down the unit cost of bandwidth.

Far more subsea cables have been decommissioned due to them not being cost effective anymore rather than not working.

That's true but I suspect for all intents and purposes the cost delta is pretty marginal.

> Indian market is much more price sensitive

That’s an odd way to say India is way poorer, and there’s no way the avg Indian can afford to pay a US price for Netflix. People being price sensitive is only an additive effect on top of that.

(India => any developing country)

It might sound an odd way to phrase things, but it was both more fine-grained and more meaningful than your rephrasing.

The average Indian earns less than 4 dollars a day. The average Indian still buys their shampoo in little 5ml sachets that cost 2cents because they can't afford the full bottle even though buying the full bottle would be cheaper in the long run. So, the average Indian definitely can't afford to pay the Indian price for Netflix either.

The average Indian is not the target market of Netflix or of any Internet business. All the talk of India being a market of a billion users is nonsense. Only the top 5 percent, maybe 10, of people in India have the disposable income for them to be a potential target customer for most businesses. For all intents and purposes, India is a market of ~50-100 million customers.

When I say that the Indian market is much more price sensitive, I am talking about this group of people, not the average Indian. The reason Netflix is priced half of what it is in the US is because this group of people are willing to pay that much for Netflix. The average Indian is simply not a relevant concern.

I wonder how that compares to the financial demographics of China? I had the impression they were bringing more citizens up into the lower-middle class, but I might have just uncritically accepted some spin.

China's per capita GDP is over 10,000 USD. Their middle class is already huge.

I think a decent analogy is that Chinese market is approximately the size of USA and India's is approximately the size of Canada.

It is not just about being "poorer", people in developing countries are indeed more price sensitive about technology services. They do not perceive the "value" of the product same as the west does.

The issue with the WTP argument is that Netflix isn't a singular good - there are many replacement goods (Hulu, Disney+, Prime Video) that push down the price via competition. The lack of raw materials makes this competition especially good at keeping prices low.

Now, if the oligopoly within video services (or anywhere else) would conspire to raise prices together - that'd be a different story. We've seen this in other digital goods. The Apple and Google anti-poaching agreements come to mind.

I disagree. I don't think that different streaming services are replacements of each other. It is inaccurate to think of them as mere "video services" (if they were even Youtube would a substitute which it clearly isn't). Their value is in the exclusive rights they have secured for different content. If a streaming service has an exclusive deal with any one of your favorite shows, you are pretty much going to have to buy it.

Speaking for myself, I have bought the subscription of at least four video services in India.

It takes time to produce physical widgets to meet demand, for manufacturers to scale, and then start benefiting from economies of scale.

With Netflix, a million people can sign up immediately, supply adjusts instantly and economy of scale is locked in earlier.

For digital goods you also have huge companies investing for the future. Your local hardware store need to continue to make a profit, whereas Amazon can absorb or push back on cost pressures for much longer.

I agree with OP that this must put upwards pressure on inflation of physical goods even if it’s a medium term thing.

There is much less ingredients in digital products that can be a shortage to give away more digital products. Compared to physical ones where capacities are much more expensive compared to the price of the product, I think the parent comment is basically right.

Of course there is chipageddon now, nothing is without physical. The point is the IP and customer service are the major cost drivers, not the property, the assembly line and the workers.

One more thing is also true: you can scale up/down really fast these days and for a fact at least this won't change your price as even your scale-down risks/impacts are much lower.

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