Netflix appeared to have made a misstep when the video services company announced it was raising the price of its unlimited DVD and online movies package by 60 percent. The reality may be different from the appearance, however -- at least from a shareholder's perspective.
Many of Netflix's 23 million subscribers are upset the company has raised the cost of unlimited streaming video and DVD by mail (one movie at a time) by 60 percent, moving from $9.99 per month to $15.98 per month. Message boards, Facebook and Internet sites lit up Tuesday after the company's announcement, as tens of thousands complained.
But the reality is that Netflix was offering a giveaway with its $9.99 unlimited streaming video and DVD-by-mail deal, and it had to get out of that business -- because the company wants to get quickly out of the money-losing DVD-by-mail business.
They are charging more for that segment now, in essence, because they want to get out of that business -- it's a dinosaur, so to speak, in the video services arena, what brick-and-mortar video stores had become to video services a few years ago.
Undoubtedly Netflix was losing money on its unlimited DVD-by-mail deal, selling the package below market costs to grow the company's customer base. Shipping costs are high and replacement costs of DVDs is high, not to mention handling requirements. The traditional DVD as a means of watching video is on the way out, for those very reasons.
Netflix is on a global path as a new-century video services company and shareholders did not send the company's stock up to more than $300 per share -- a 52-week high -- for old-school methods. For Netflix to continue on its fast-growth course, successfully expanding into new markets including Latin America, and gaining new customers in the U.S. through profitable services, Netflix (NASDAQ: NFLX) is steamrolling toward getting out of the DVD by mail business altogether.
Charging more is a good way to get that process started.
When the company began with that measure, it was new school vs. competitor Blockbuster's old-school -- brick and mortar stores renting DVDs. Netflix effectively put Blockbuster out of business with its new model. But now that model is old-school and streaming video services, where there's no shipping and handling costs and no DVD inventory and replacement costs, is new school. And it's the path on which Netflix is moving fast.
Shareholders are roaring in approval while customers whine, jacking up the company's stock almost four percent, to $301.36 on an increase Wednesday of $10.36 by mid-morning.
For customers who liked the benefit of buying monthly unlimited streaming and DVD by mail services, that's a problem. They had a great deal and they know it, and they don't want to see it go. They don't care if Netflix makes money.
But in September, current users will no longer have the benefit of Netflix's loss-leading proposition.
The good news for users is they can actually pay less per month now, and have unlimited video services, if they are willing to forego getting DVDs by mail. For $7.99 per month customers can now get unlimited streaming video services from Netflix, watching all the programming they want at $2 less than they were paying before.
There just won't be anything in the mailbox.
Soon, though, they won't even know the difference -- and they will be saving money, since neither Netflix or most other companies will be shipping DVDs by mail. That industry segment is going, going, and almost gone.