What's a buck worth? According to Netflix (Nasdaq: NFLX), it's worth a Blu-ray disc. The DVD-rental specialist will be charging subscribers an extra dollar per month if they want unlimited access to the company's library on Blu-ray.
On the surface, the surcharge seems fair. Head out to your local consumer-electronics superstore, and you'll see higher prices for Blu-ray over the conventional DVD. Likewise, if you go to a multiplex and you want to see Eagle Eye on the superior IMAX (Nasdaq: IMAX) screen, you'll pay more. So why should things be any different on the rental end? Until Blu-ray retail prices drop, it makes sense for Netflix to pass the extra cost on to its end users.
Boosting the monthly subscription price of its most popular unlimited rental plan -- from $16.99 to $17.99 a month, with no more than three discs out at a time -- is reasonable. It's right. It's just. It's necessary.
So why am I not smiling?
Netflix sings the Blu-rays
For one thing, Netflix could have used a little better timing. The increase comes just two days after Netflix lowered its near-term outlook on subscribers. So the company missed its member tally for the third quarter, and now it wants to raise rates? The consumer is feeling the economic pinch, and Netflix wants more money?
The company took a hit with the recent postal-rate increase, and it didn't pass on the cost to its subscribers. For a company that pays shipping both ways, postage can be a real margin-eater, especially with customers who watch a lot of movies.
Still, I understand that Netflix is a business, not a charity for film buffs. It has a right to raise prices. It's not under a government mandate to freeze rates in the near term, the way satellite-radio giant Sirius XM Radio (Nasdaq: SIRI) is.
And in theory, this is a 6% increase only for those who relish the crisper quality of Blu-ray. Cable and satellite television subscriptions routinely bump up their prices, too. So what's the big deal?
Well, if the economy worsens, consumers will have to prioritize. Do I ditch the Netflix subscription, or buy fewer lattes a month? Do I keep those red mailers coming if it means I have to order one less pizza?
However, Netflix has often attracted competition when it bumps its prices higher. Whether faced with the threat of Amazon.com (Nasdaq: AMZN) entering its niche domestically, or dealing with the initial -- but ultimately fleeting -- success of Blockbuster's (NYSE: BBI) Total Access, Netflix rarely makes its moves in a vacuum.
The Blu-ray premium may also lead some to wonder whether the days of free, unlimited Watch Now streaming movies are numbered. It seems unlikely, especially since the company has been marketing Roku set-top boxes under the premise that buyers would never have to pay more than their regular subscription fees for the service. But you never know.
"For a one-time purchase of $99, Netflix members can watch as much as they want and as often as they want without paying more or impacting the number of DVDs they receive," Reed Hastings noted in a May press release. Getting Blu-ray at no additional cost never came with that kind of ironclad guarantee, but spoiled subscribers probably felt entitled, since Blu-ray titles popped up on Netflix last year.
A Blu-ray opportunity for Redbox
The competition, for now, isn't going for a hike along with Netflix. Redbox, the biggest threat on the horizon for Netflix, is sticking to the $1-per-night rate that it charges at its growing network of more than 10,000 automated kiosks around the country. Redbox is just now starting to test Blu-ray optical discs alongside its original DVD titles. It could -- and should -- charge more for Blu-ray rentals, but if it doesn't, this may be the perfect opportunity to set itself apart from Netflix.
Bankrolled by consumer-facing giants McDonald's (NYSE: MCD) and Coinstar (Nasdaq: CNST), Redbox initially seemed like another flimsy threat to Netflix. Who wants to deal with a kiosk? Who wants to settle for the limited physical inventory? Who wants to drive to get a flick, when it may not even be in stock?
Well, Redbox has tackled that last hurdle. It now allows renters the ability to reserve titles online. You still have to make a trek out to the local grocery store or fast-food joint, but a buck can go a long way on a frugal family's Saturday night.
Redbox announced in May that it intends to file for an IPO, so it may be getting aggressive on the Blu-ray pricing front to keep penny-pinching renters coming. I'm not keen on Redbox as an investment, given the uncertainty about how digital delivery will unfold, but I know the company could certainly be a thorn in Netflix's side, especially when consumers begin working the value propositions.
Do I want to pay Netflix for a month of flicks with Blu-ray access, or go for 18 nightly rentals through Redbox?
Value propositions cut both ways. I hope Netflix knows what it's doing.
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