Late Tuesday, Netflix announced that it would raise the Internet plus DVDs in the mail plan from $9.99 per month to $15.98 per month. This decision has caused a huge customer backlash. Why did Netflix raise the price despite widespread customer discontent?
1. Netflix wants to fast forward the transition to digital media over physical.
2. The company hopes the new pricing plan will push more people into the streaming service, which will help Netflix to lower its postal expenses. The cost of shipping a DVD can be as much as 75 cents per disc, while analyst Mike Olson of Piper Jaffrey estimates that it costs just five cents to 10 cents to deliver a movie over the Internet.
3. Netflix has been trying to lure subscribers away from its DVDs by offering cheaper plans that include movies and TV episodes delivered over its Internet streaming service. In November, it began offering a streaming-only plan for $8, its cheapest option at the time. Yet Netflix customers aren't flocking to Internet video as quickly as some analysts said the company expected. So the company is adjusting its pricing to reflect the cost of its DVD business and to help bring in more money to cover growing expenses for streaming content.
4. Netflix needs additional revenue to build up its streaming service. In the first three months of this year, Netflix spent $192 million on streaming rights after putting $406 million into the library last year. Licensing costs are expected to jump to $1.3 billion to $1.4 billion next year, Arash Amel, research director for digital media at IHS Screen Digest, told AP.
5. The company wants to make more money per subscriber. It got a monthly average of $11.96 per subscriber in the first quarter of this year. But at the end of 2006, before Internet streaming was launched, the average amount paid per subscriber was $15.87 per month.