5 Losers in Netflix's Price Hike

I'll admit it.

I fell for Netflix's (Nasdaq: NFLX  ) bait and switch. I was reluctantly streaming when the video buffet operator initially rolled out the service in 2007, but now I consume more streaming content through Netflix than from the red envelopes that arrive at my home.

In short, I'm in what will likely be the majority of Netflix users eyeing a huge price hike come September. I need the discs. I need the streams.

Well-played, Netflix.

However, the new pricing plans and decision to split discs and streaming into two separate products will force a lot of couch potatoes to reconsider what they expect out of Netflix.

Let's go over some of the companies that will come up short here.

Apple (Nasdaq: AAPL  )
Where would the iPad be today if it wasn't for Netflix streaming?

It may seem like a ludicrous question to ask, but Netflix's streaming application was the most popular third-party download when the original iPad came out last year. Unlike many of the programs available at launch that seemed to work just fine on smaller iPhones and iPod touch devices, Netflix made the most of the iPad's large screen to display rich video.

The app -- and perhaps even the iPad itself -- wouldn't have had such a strong launch if it wasn't available at no additional cost for existing Netflix subscribers.

Google (Nasdaq: GOOG  )
YouTube's parent may benefit initially from the dearth of Netflix streaming. Instead of Netflix being the prime bandwidth sipper during peak Internet usage hours, folks will just spend more time on YouTube.

Google makes the loser list, though, because of Google TV.

Big G stumbled during last year's launch, largely because it failed to get television studios on board. The one thing it did get right is making sure that Netflix streaming was a prominent application. How valuable will that be when Netflix likely loses millions of streaming accounts in two months?

Sony (NYSE: SNE  )
Sony wasn't the only consumer electronics component maker to fall for the Netflix button earlier this year. It joins Toshiba, Samsung, and Panasonic (NYSE: PC  ) in adding prominent "Netflix" buttons to the remotes of their Blu-ray players, Web-tethered TVs, and set-top boxes. This doesn't seem like such a good move now that streaming is a premium on top of a premium DVD rental service.

Sony is in bed with Netflix another way. PlayStation 3 owners can stream Netflix right through their Sony video game consoles. Microsoft's (Nasdaq: MSFT  ) Xbox 360 had Netflix exclusivity initially, but all three consoles now let couch potatoes surf through Netflix's digital vault with their console controllers. PS3 is the only console of the three to also play Blu-ray discs, making it the console of choice for video buffs. It may not seem as relevant if Netflix streaming begins to fade in popularity now as an upcharge item.

TiVo (Nasdaq: TIVO  )
The patent-rich DVR pioneer was an early adopter in home theater integration with Netflix. The two agreed to team up in 2008, long before many other component makers saw the light of Web-based streaming through TVs.

Even now, three years later, many non-TiVo DVRs have no way to stream Netflix.

Some will argue that it's not much of a differentiator. TiVo has been hemorrhaging subscribers for years, and its future rests primarily on its ability to milk its patents. Either way, the potential for popularity of streaming on Netflix to wane won't make TiVo boxes move any faster.

Netflix
The market wasn't sure what to make of Netflix's move. The stock spiked originally on the news, but then it began to give back most of its peak gains.

Unlike the favorable reaction to Netflix's price hike in January, there's been an uproar over what translates into a dramatic increase for those who will want to stream and spin discs.

There's a lot riding on this, primarily the company's streaming model. For the first time in a long time, it's easy to fathom subscriber growth slowing if not outright retreating. This could be a $500 stock in a year if Netflix's move is well-received or fall back to $100 if it's exposed.

The end result is that Netflix will now be accountable for the depth of its streaming catalog, something that wasn't worth complaining about when it was simply added to DVD plans as a bonus.

Netflix is trying to fix what seemingly wasn't broken, so here it rests on the list of companies with more to lose than gain with this move.

What will you be doing about your Netflix subscription? Share your thoughts in the comment box below.

The Motley Fool owns shares of Apple, Microsoft, and Google. Motley Fool newsletter services have recommended buying shares of Apple, Microsoft, Netflix, and Google. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a diagonal call position in Microsoft. Motley Fool newsletter services have recommended buying puts in Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

Longtime Fool contributor Rick Munarriz has been a Netflix shareholder -- and subscriber -- since 2002. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


Read/Post Comments (14) | Recommend This Article (10)

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 13, 2011, at 4:18 PM, TheDrake2 wrote:

    Cancelling outright.

    The Drake

  • Report this Comment On July 13, 2011, at 4:50 PM, MacDaddy00 wrote:

    $16 per month is still cheaper than $50-75 a month for basic cable. Whether or not I cancel NetFlix depends on if they start adding decent content to the streaming service.

  • Report this Comment On July 13, 2011, at 5:31 PM, jeffbox1 wrote:

    Up until yesterday, I subscribed to the Netflix streaming and 1-Bluray service along with Amazon Prime all piped through my Panasonic internet/Bluray player to the HDTV.

    Over time I noticed that I was really only swapping the disk one or 2 times per month. Never have been a big fan of the NFLX disk queue because the item at the house is usually not what I want to watch at the moment.

    So, to get recent premium releases, I find myself using Amazon and paying their rental fee to watch what I want, when I want.

    Meanwhile, I received an email today from my old buddies at Blockbuster offering a new rent-by-mail service. Simply order the specific movies you want on line (no queue) and pay by the movie for mail delivery. Return in prepaid envelope a week later. Pure usage based with no monthly fee.

    This seems to have possibilities and I will probably try it out. Never thought BB would come up with something to rekindle interest.

    Your mileage may very…but it is an interesting time for the industry.

    I think NFLX made a strategic error here. What I call the p-ss-off factor of a 60% price bump does not add any good-will to their balance sheet.

    I don’t care who they are…when someone hits me with something like that I look to alternatives. Emotions are real and do play a role here.

  • Report this Comment On July 13, 2011, at 5:43 PM, keegan2012 wrote:

    What I found particularly interesting is an analyst on CNBC stating out right that the billing modifications were not increases. Wait, what? I am going from 9.99 to 15.98 and its not a cost increase for me? I was not a math major in college but I did get through first grade. 60% is an increase no matter how you want to spin it. Its time I read more books anyway. My last payment will be july 24 and then I am done. The streaming content is limited and unsatisfying. The dvds I can get elsewhere. Buhbye.

  • Report this Comment On July 13, 2011, at 6:16 PM, cfrdog wrote:

    I think they will end up increasing their ARPU but churn will go up and revenue growth will slow. They did have a good thing going. I always thought since cable was so expensive at nearly $100 per month they had room to increase prices but I don't find Netflix to be a replacement for cable, its an add on to me. With that said they are bound to lose customers. People will flock to redbox and blockbusters, they will get sick of the drives and waits and come back to netflix. In the end Netflix wins. I dumped the stock at $167 thinking it was overpriced but didn't factor in the ipad effect. Streaming is where its at and once they get the catalog up to par people will jump on that and see it as a huge value and the discs will be gone forever just as Netflix wants.

  • Report this Comment On July 13, 2011, at 6:19 PM, boycottnetflx wrote:

    Im out, Aug 11 is my last payment.

  • Report this Comment On July 13, 2011, at 6:25 PM, trip70 wrote:

    I will keep Netfix subscription and the stock! I received an email from them yesterday. My cost will go from $14.99 per month to $19.98 a month.Its a great bargain! I cant drive to,ah, well Blockbuster closed in my town, for that much in gas. 2 DVD's as fast as me and the Mrs can watch and all the kid's shows available on the Wii and Bluray and computer for the 5 kids.Not to mention all the ones I enjoy . Ill stay a loyal customer and stock holder. Good deal !

    WTH 60% increase you say. Its $6 per month...Show me how to replace it for a price close....

    Long Netflix!!!!!!!!!!!!!!

  • Report this Comment On July 13, 2011, at 9:59 PM, blissmanna wrote:

    I said last week I thought NFLX could possibly go as high as $400. Now I am certain of that! There will be many more add on subscriptions than fall offs, the move geographically south will ease any pain from the drop-offs that do occur, and in the end it all STILL sits on the shoulders of what content deals NFLX can secure.

    So here's the deal as I see it... NFLX is not being greedy. With the move to split plans and charge more the retail charges are still quite low, and NFLX will use the added cash to help secure those content deals that will grow the subscription rate. They NEED the income to share the wealth with content creators and providers.

    It might take 3 to 4 months of uncertainty and then NFLX will resume a steady climb up to between $400 and $500.

  • Report this Comment On July 14, 2011, at 1:30 AM, MIAfool100 wrote:

    I have to make a statement to Netflix. It's arrogant and disappointing for Netflix to raise the price so much. So, I'll drop the DVD's and keep the streaming.

  • Report this Comment On July 14, 2011, at 6:27 AM, MrChapel wrote:

    I live in Europe, so no Netflix here yet. But here's the thing. I recently moved into a new apartment. I had to lug two huge boxes with DVDs and BluRays. Plus, being a bit tech savvy, I have several Terabytes of movies, TV shows and lossless music files on a NAS to stream around my home network.

    I have a BluRay player hooked up to the network but have about 4 BluRays among my collection of discs. A single one costs me about 16 Euros, which is pretty cheap here, but still, is a lot of money. The high pricing of music and movies here, has made me reluctant to buy new discs. A boxed set of NBSG comes out around a hundred or more Euros. Also, the only videostore around? Closed about four years ago. I've got two Logitech Squeezebox players and a HD mediaplayer, all hooked up to a high-end audio system.

    I'm busy right now, ripping my remaining discs and placing them on the NAS after which they're being put into storage. I only have basic cable because it comes with internet access and DSL where I live is too far from the phone exchange. I don't watch cable TV, instead preferring to download the programs I do watch in HD. Since I pay for basic cable I see no problem with that, since the programs are on basic already (TopGear).

    I would love to have a streaming option like Netflix for that price, giving me access to old movies, TV shows etc. I can do without the discs especially since very few movies nowadays come out that are really interesting. We are living in a wired world that is getting more and more wired every single day. True, Netflix will go through a time of turmoil losing subscribers, but it will settle.

    Many people will be glad to get rid of the huge disc racks in their living rooms. Not to mention pare down the number of audio/video equipment they have. Currently, I have an AV receiver, a BluRay player, SACD Player, Squeezebox and HD mediaplayer set up in the living room. In my home office, I have only a high end stereo amplifier and a Squeezebox hooked up to the network, playing lossless tunes from my NAS. The Bluray and CD player haven't actually been used in six months! Looking for a new TV case for the living room is problematic since most high end models here, only have room for a set top box and a BluRay player, or you'll have to go and open up the side doors so your remote can work.

    The trend today is sleek and minimal. Apple for instance. Connecting everything to a home network. Streaming. Netflix is playing into that world and they'll be doing well in the future, from what I can see. I do hope this decision will have a short term drop in price so I can get me some more of the stock.

  • Report this Comment On July 14, 2011, at 11:08 AM, mlittle901 wrote:

    Checking out the alternatives & weighing options. Curious about Amazon Prime and Hulu Plus. We don't usually watch enough discs per month to make the increase worth it for us. Will probably drop the discs & keep the streaming when the price goes up. Love getting discs in the mail in snowy winter, but in good weather I don't mind the short drive to Red Box. If we end up keeping the subscription, I'll be changing it month to month as I do now. It's a big change, and a disappointment. Been NFLX members since 2005; there are no perks for that though. Would like a way to port our extensive queue elsewhere! For now I'm pasting it into a text file & will take that with me if we jump ship.

  • Report this Comment On July 14, 2011, at 3:36 PM, scottwsx96 wrote:

    Rick,

    You really nailed it in your second to last paragraph. Netflix wants to push forward their streaming and with their price move they are hoping people ditch their DVD subscriptions in order to keep the streaming and keep their monthly cost about the same.

    The problem with that is that, unless you love old B-movies or have a man-crush with Steven Seagal or Jean Claude Van Damme, there isn't really a whole lot of good content on Netflix Watch Instantly.

    It's so bad that in my household's Netflix account, the suggestions are at best 3.5 stars with most at 2.5 stars or even lower. Remember that their star ratings are their guess as to what they think you will rate the movie at. This means they are saying that we won't like most of the movies they are recommending to us on Watch Instantly! Crazy, right?

    It goes farther than content though. They also restrict Watch Instantly to the main account; sub-profiles don't get the feature. So essentially everyone in the household uses the main account for Watch Instantly and as such the ratings and recommendations get completely out-of-whack as none of us really have the same tastes.

    All of these flaws were easy to overlook when Watch Instantly was a nice freebie added to our DVD account. But now there are some awfully bright lights shining down on those ugly warts.

    Netflix is forcing customers to make a choice and I think it is intentional. But they should have tried to clear up those blemishes on their preferred offering before turning on the lights.

  • Report this Comment On July 18, 2011, at 10:32 AM, mgjr73 wrote:

    One, you really can't compare Netflix v.s. Cable apples to apples. In times of calamity, whether it be war, weather, or the white house, you turn to CNN or whatever favorite news channel for the blow by blow account as the events unfold.

    Two, it may be true that this move will increase cash for Netflix enabling them to buy more content but what we're missing here is that Netflix still did not gain any leverage... just more money to show it will be able to afford the price of licensing the studios dictate. What happens then on the next contract re-up? If streaming takes-off, there's nothing to stop hollywood to bump up the price which in turn gets passed on to consumers. What's to stop the studios from banding together and creating their own brand of streaming product and "cutting out the middleman". They already own the stuff and they don't have to pay their lawyers to type up contracts and what not. The cable companies they already own will be more than happy to say goodbye to Netflix.

  • Report this Comment On July 26, 2011, at 3:00 PM, petejensen wrote:

    The price increase was a wake-up and may be a major paradigm change for us.

    A decision to dump Netflix was triggered two nights ago when the DVD wouldn't play properly on either of our two DVD players.

    While that's not a regular event, Netflix must clean up their inventory of scratched/scuffed DVDs if they are looking to hold on to their market at the higher price.

    While the streaming technology has improved, Netflix's streaming library is stale and not a stable offering.

    On a value received basis I'm considering:

    -- Two redbox DVDs each month

    -- One night out at a multiplex and a light dinner date with my wife.

    pete

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