Netflix Inc. announced significant price increases by separating unlimited streaming plus unlimited DVD plans into separate packages, and hiking the price of the DVD plans.
Netflix will no longer be offering plans that include both unlimited streaming and DVDs by mail. Unlimited DVDs for one out-at-a-time (no streaming) will cost $7.99/month, and 2 DVDs out-ata-time (no streaming) will cost $11.99/month.
Unlimited streaming (with no DVDs) will remain unchanged at $7.99/month. Subscribers will now have a choice between streaming only, a DVD only plan, or the option to subscribe to both. The new pricing will take effect immediately for new members and on September 1, 2011 for existing members.
Now, members have to decide which they'd prefer, and it they choose to continue the dual option plan, well, the price will be considerably higher. Meanwhile, some subscribers are planning to cancel their Netflix membership account due the changes.
Netflix's streaming remains at $7.99/month, but unlimited streaming plus 1 DVD will now cost $16/month (up 60 percent) and unlimited plus 2 DVDs will cost $20/month (up 33 percent).
We illustrate 6 scenarios with higher average revenue per user (ARPU), partially offset by increased churn resulting in a price range of $220-$330. Our analysis assumes that monthly ARPU increases to $12.60 or $14.00 (from $11.80 currently) from the price hike, tempered somewhat from a mix shift toward streaming only plans, said Youssef Squali, an analyst at Jefferies.
Squali said this impact is partially offset by a 20 basis points, 35 basis points, or 50 basis points increase in churn in third quarter/fourth quarter, resulting in a total of 6 scenarios.
As a starting point Squali assumed that currently 25 percent of subscribers are streaming only ($7.99/month), 25 percent streaming plus 1 DVD out ($9.99/month), and 50 percent other higher priced plans (about $14.60) for current ARPU of $11.80. Assuming a mass exodus does not occur, he sees upside to estimates.
While $7.99/month or $9.99/month plans often flew under the radar on subscribers credit card bills, Squali believes it's important to point out that $15.98/month or $19.98/month could make many subscribers flinch, or at least be more aware of it.
Further, downgrading a plan to streaming only may not provide enough new content to satisfy many subscribers. As such, it is possible that churn could pick up more meaningfully than Squali has assumed in third quarter/fourth quarter, eating into subscriber growth and valuation.
On Netflix' blog, the company noted that the change will separate the plans to better reflect the costs of each, helping ensure a long life for DVDs by mail. The site further noted that treating DVDs as a $2/month add-on to unlimited plans didn't make much financial sense given shipping/postage costs.