Netflix Price Increase Bets on Streaming, But Disaster May Await

on July 13 2011 8:31 PM

The Netflix price increase outraged many customers.  And why shouldn't they be when it's as large as 60 percent?

However, 60 percent may be a deceiving figure.

It's true that Netflix used to offer unlimited streaming and DVD-by-mail for just $9.99 per month.  Now, it's offering unlimited video streaming for $7.99 and unlimited 1 DVD out-at-a-time for $7.99.  The difference between $10 and $16, of course, is 60 percent.

However, Netflix is trying to position itself as a video streaming service that's now offering the cheaper price of $7.99 (compared to $9.99) for video streaming alone.

Netflix said it wants to separate the two services to better reflect the costs of each.  If one reads between the lines, this is what Netflix is saying:

The DVD mailing business is not profitable enough and we want to get out of it.  However, since we can't kill it all at once, we're going to charge customers a lot of money so that we make sure it's profitable.

Currently, it loses money on shipping DVDs to a customer if it sends out three titles or more per month, according to analyst Nat Schindler of Bank of America.

And it makes sense.

To stream movies, it's just a matter of bandwidth and licensing rights.   To mail DVDs, Netflix has to swallow the additional cost of the physical DVD production, the cost of handling, and the cost of mailing.

It's potentially frustrating for customers, too, because although Netflix's DVDs by mail are 'unlimited,' how many can you really get it per month (because it takes time to ship it to and from Netflix)?

Streaming, meanwhile, theoretically offers you about 720 hours of content per month.

So did Netflix just make a brilliant move by lowering the cost of its streaming service and separating its DVD by mail business?

Not quite. 

If you've ever used Netflix's streaming service, you know that the selection is very limited.  It's not all Netflix's fault because some content owners still prefer the DVD format.  However, where does that leave customers?

Selection, i.e. the ability to watch that one movie you really want, is really important to most customers.  With both DVD by mail and streaming, customers had access to enough titles. 

With streaming only, though, most customers will probably have to eventually visit a Redbox or comparable option to obtain physical DVDs. 

Redbox is $1 per trip.  Maybe you need two DVDs on some months, so that's $2.  And maybe you want 3 DVDs on rare months.

At some point, it no longer makes sense to pay Netflix $7.99 for providing a service that only partially fulfills the needs of customers.   

 

 

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