Netflix Gambles on Higher Prices

Some Netflix (Nasdaq: NFLX  ) customers like the service for its unending flow of red DVD mailers, and others care more deeply about the online video streams. We're about to find out more about the split between these camps.

Netflix just announced a total split between its two distinct services, offering DVD-only plans for $8 and up to complement the standalone $8 all-you-can-stream product. If you want both DVDs and digital streams, you'll have to pick a DVD plan on top of the streaming deal.

For those of us who expect a little bit of everything, the way things have been working ever since online streams became a nearly free feature of every mailer plan, this amounts to a pretty drastic price increase. The basic unlimited one-DVD option plus streaming now comes out to $16, or 60% above the old $10 price.

The changes are effective immediately for new members and by Sept. 1 for existing Netflixers.

The company says that DVDs remain more popular than expected, so there's a new sense of focus on that side of the business. Mailing services have even been broken out into a new business division, perhaps reportable as a separate operation in SEC filings. I'm waiting for next week's earnings report with bated breath, if only to find out when we'll see separate numbers for DVD and streaming customers.

Three months later, we'll get the first hint of how this change really worked out. Will existing subscribers leave the service in droves, lured by suddenly more affordable offerings from Coinstar's (Nasdaq: CSTR  ) Redbox and DISH Network (Nasdaq: DISH  ) -plus-NCR (NYSE: NCR  ) Blockbuster boxes? Will most subscribers simply pick one offering or the other but not both kinds?

Or will many of us simply shrug at the comparatively much larger but still pretty affordable expense of another $6 a month and thus boost Netflix's profit margins something fierce? Remember that Sirius XM Radio (Nasdaq: SIRI  ) is widely expected to pull a move like this in 2012, and that this is often noted as a reason to buy the stock. Why would Netflix be any different?

Netflix shares gained a couple of percent after this announcement was posted on a company blog, so investors see a modest value in the new pricing plans. I'd agree, though subscribers to our Big Short newsletter may feel differently -- they've opened a bearish position on the stock. But what do you think? Tick a box in this poll, and then tell us how you really feel in the comments section below.

Fool contributor Anders Bylund owns shares of Netflix, but he holds no other position in any company mentioned. Check out his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Coinstar and Netflix as well as buying puts in Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (21) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 12, 2011, at 7:31 PM, RainierMan wrote:

    A lot of Netflix customers will not find this to be such a wise move. Netflix streaming choices are far inferior to say, Amazon, so they could end up having customers leave, or opt for DVD only plans, and pay less each month (which is what I will do). We'll get our streaming from a different vendor, and use Netflix for as long as we need DVDs, which will hopefully not be very long, and then we'll dump Netflix. I used to like the company, but they are blowing it now.

  • Report this Comment On July 12, 2011, at 7:34 PM, mountain8 wrote:

    I already canceled. What's ironic, I was just pondering canceling my cable service and living with Netflix alone. Now I'm keeping my cable.

    I'll sell my stock by Friday when I see what the market reaction is.

  • Report this Comment On July 12, 2011, at 7:59 PM, bloodhoundgrl wrote:

    It's not six bucks, it's the hubris of a 60% increase with no value added only six mos after the last increase. They're gambling that they have no real competition when in fact, there're more choices every day. Not a good time to kick your customer base. I have a Roku box and they load new channels, most free, every week then there's Amazon's streaming now cheaper, Hulu and Hulu+, Redbox, NCRs BB kiosks, Dish now owns BBK, cable cos. have on demand streaming, and don't forget your local free library that really does get most of the new DVDs pretty fast. NFLX has a P/E of 84: poised to drop compared with 35 at CSTR & 21 @ NCR. Insiders have sold 19% of their holdings in the last 6 mos. and shorts make up 21% of float. The only way this thing's going up is a short-term short squeeze as everyone bails at once, then look out below. Not short yet but looking for an entry.

  • Report this Comment On July 12, 2011, at 8:12 PM, uconnhusky2 wrote:

    I know I'll be cancelling. First they added blu-ray fees, then they delayed new release availability by 30 days, now they want to charge for something I rarely use yet a feature that made it worthwhile to put up with the other negatives. It looks like I go back to Blockbuster or cable On-Demand services. The Netflix stock bubble is about to pop unless shorts get squeezed. It is already one of the most ridiculously overvalued stocks out there. I smell a Crocs.

  • Report this Comment On July 12, 2011, at 8:22 PM, karmicinvestor wrote:

    Netflix bears have been waiting for a foothold, and now they have one! I just looked at 5 Twitter pols and 60+% of people are unsubscribing.

    I have gotten rid of my Netflix account today, and I will be buying puts (as many as I can afford) tomorow morning.

    If you think this is not a big deal, you are wrong. The only true clinch Netflix had was their LOW COST, and well....

    Mark my words there is lots going on behind the scenes here. For 1 Netflix has pushed earnings back to the 25th, and I know why.Their earnings will be really bad! 2- that bogus press release about Latin America (bogus) it was a stunt to deflect attention away from earnings losses to come. They claim 40 million new users to tap?? In third world country's, when they can't suceed in Canada, yeah right! I'll bet they will NOT even manage 5 million users in all 43 country's- especially with the great quality broadband over there. Oh, the third worlders can afford a 60% increase in subscription costs!

    Give me 30 days and I'll bet $NFLX falls a MIN. of 20%. Call me an idiot if I'm wrong, but I'll put a friendly wager on this.

  • Report this Comment On July 12, 2011, at 8:30 PM, Bulgogi wrote:

    @RainierMan

    >> Netflix streaming choices are far inferior to say, Amazon, so they could end up <<

    Common..you can't be serious right? I have a Prime account and couldn't find a single movie worth watching. With Netflix, although I had the option to get DVDs its been 5 months since I sent back my last DVD movie.

    @Mountain8

    >> I already canceled. What's ironic, I was just pondering canceling my cable service and living with Netflix alone. Now I'm keeping my cable. <<

    LOL...not sure how that math works

  • Report this Comment On July 12, 2011, at 8:57 PM, MKArch wrote:

    What this is really about is the fact that NFLX model is unsustainable and they are flailing around to find some way to make up for skyrocketing content costs and an inevitable decline in their subscriber base once they saturate the U.S. market and existing subs continue to walk away in droves. BTW you don't have to wait 3 months to see if subs walk in droves they've been doing it for years only masked by new additions replacing them. Of course this all results in the share price going up. If they announced Hastings was suffering from hemorrhoids NFLX would go up 5%.

  • Report this Comment On July 12, 2011, at 9:04 PM, MKArch wrote:

    <<<Of course this all results in the share price going up. If they announced Hastings was suffering from hemorrhoids NFLX would go up 5%.>>>

    **********************************************************

    I forgot that would be after Goldman upped their price target to $350.00 on this new development.

  • Report this Comment On July 12, 2011, at 11:19 PM, ejclason2 wrote:

    I just canceled my account.

  • Report this Comment On July 12, 2011, at 11:44 PM, jkellynewyork wrote:

    Netflix still offers the best value out there. For that reason, few will change their service plan. Netflix will reinvest and again provide better content, increasing the value of the streaming service, and roping in additional subscribers as a result -- the growth will continue

  • Report this Comment On July 12, 2011, at 11:55 PM, dlchase24 wrote:

    There are many ways to look at this, and I'm not sure any of them are truly positive.

    Shouldn't they have known about the continued widespread use of DVDs? Was that really that big a variable that they couldn't anticipate high usage when they last changed rates and chose to focus on streaming?

    I understand sometimes you have to raise prices to cover increased costs, but the percentage increase again makes me question what they were thinking when they last raised prices. The break down between streaming and DVD customers will be interesting to see as well as how many actually sign up for both.

    Of course the worst part, as a Netflix user, is the poor options I have when it comes to selection. I have a plan that also sends a DVD because it provides broadens the movie selection and allows me to see things I can't get through streaming. For that, it's worth a couple bucks. However, THAT is not worth doubling my monthly costs. So I can either get the DVD package and wait a while for movies to come in, or get the instant package and lose on selection... being stuck in the middle makes me want to consider other options.

  • Report this Comment On July 13, 2011, at 3:09 AM, alldressedup wrote:

    netflix first offered streaming for free to anyone on an unlimited plan while they were testing the waters and building up the steaming content and bandwidth. Did you think "free" would go on forever? A while ago they began offering a streaming only subscription for a few dollars less than the unlimited 1 out at a time to test the waters for a streaming only option. I agree that this change is a big raise but don't you think they now know exactly how this will flush out from all that water testing? Some will be pissed and cancel everything, some will go to streaming only, some will go to disc only, and most will keep both (perhaps going to a fewer number of disc out at a time). This raise will generate more revenue big time and more $$ is good for the bottom line and good for investors in the long term no matter how the wind blows in the short term.my raise is going from 12 to 18 dollars a month for 1 disc out at a time (with bluray) - $6 or 50% increase. My direct tv bill is 129 a month; even at $18 a month, I'm more likely to cancel direct tv before I cancel netflix.

  • Report this Comment On July 13, 2011, at 9:17 AM, wrtraxler wrote:

    Netflix on Facebook received a little over 13,000 responses to the price change, 90% negative. They do offer the better service out there for the price but their CEO stated that for $9.99 you got the DVD side as the extra with streaming. In reality many feel you got the streaming with the DVD side as the content for streaming is less than impressive (no new releases). Netflix will lose subscribers but make up for it in profit. They would have been better served coming out with a $12.99 plan for either instead of $17.99 to have dvd/streaming. The opportunity here is with the competition, will they jump on this and offer some new pricing plans of their own. If I was at Amazon or Hulu I would be pounding the ads showing our value compared to Netflix. Look for Netflix stock to rise 5-8% but can they sustain profit with less subscribers?

  • Report this Comment On July 13, 2011, at 9:21 AM, espen19 wrote:

    The Streaming is garbage and there is not enough available to charge his amount for it..... They will go back to numbers like they were before they started streaming, plus they are going to alienate some long time customers that feel they should be treated better than this. I think this is bad news for the stock...

  • Report this Comment On July 13, 2011, at 9:25 AM, waterinfo wrote:

    SELLL YOUR NETFLIX STOCK AND BUY SIRIUS.

    All the hulla-balloo whether SiriusXM will raise their rates by a dollor two while Netflix goes and raises their rates by 60%.

    I can easily afford another $7 per month for my combined DVD/BluRay/Streaming subscription to Netflix..............but no way I will sit still for a 60% price increase all in one shot.

    My subscription will be cancelled before the next billing cycle. Meanwhile, I use my SiriuxXM every day, because I'm in my car every day.

    I think that the SiriusXM management has a little more respect for their customers than trying to rip them off.

  • Report this Comment On July 13, 2011, at 9:26 AM, PsykO wrote:

    Sell, sell, sell! Many avid fans like myself will be cancelling everything Aug. 31st. Check out their facebook page. This company benefited from passionate and loyal customers that spread the word watch, it all turn now.

  • Report this Comment On July 13, 2011, at 9:59 AM, TMFCop wrote:

    Buh-bye, Netflix!

    You know what, I didn't even wait. I cancelled my account immediately. I'm not a big movie person as it is so I had the basic subscription model. Watching a movie every now and then was okay with me.

    Of course, as everyone knows, NFLX's streaming library was absolutely horrible. Yeah, you might find a good show every once in awhile, but the overall selection is dismal.

    So essentially what Netflix told me was they wanted me to pay an exorbitant sum for what was really substandard quality. No thanks! Redbox really is a better alternative for my viewing habits.

    A very silly move, Netflix. I say sell Netflix, buy Coinstar (Nasdaq: CSTR)!

    Rich

  • Report this Comment On July 14, 2011, at 4:17 PM, Eduardojuan wrote:

    Are we pissed? Of course we are. Not too smart a move for a company to jeopardize its premier customer service image. Stock dropped over 4% today vs 0.67% for SPX

    I imagine the folks at Hulu must be smiling.

  • Report this Comment On July 14, 2011, at 4:18 PM, Eduardojuan wrote:

    And it wouldn't be half as bad if they had the same choices and options for streaming as they have for DVD

  • Report this Comment On July 14, 2011, at 4:25 PM, Eduardojuan wrote:

    The negative comments on Facebook is now over 61,000

  • Report this Comment On July 15, 2011, at 5:36 PM, dustinrecsports wrote:

    Dear ignorant majority of Netflix subscribers who didn't see this coming,

    http://stillstandingrighthere.blogspot.com/2011/07/netflucke...

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