Time to Unplug Netflix?

Say it isn't so, Netflix (Nasdaq: NFLX  ) . Tell me this affordable, convenient product of yours isn't going to become an expense that people have to think twice about every month.

The details of Netflix's price increase have been widely discussed across the Web. The $8 streaming-only product and $8 DVD-only option represent a 60% price increase for those who want to keep both options. While the stock market is cheering the move, I think it's too far too fast for Netflix, an idea that customers seem to agree with.

Giving customers a choice
The new pricing model will split customers into two camps. Some will choose their favorite distribution method, either streaming or DVDs, and some will choose both. I don't see either as a good option for Netflix. The streaming-only option doesn't change, but those who choose DVDs are going to pay less than they did before and probably won't miss streaming content at all.

Worse, for those who like both streaming and DVDs, Netflix is raising the price 60%. Not a dollar or two, but a whopping $6 a month, something no customer can be happy about. It may be worth the money for heavy users, but for customers who viewed Netflix as a perk, this goes from being a great value to a substantial expense every month. And there may be more of those customers than Netflix was anticipating.

As I am writing, there are 58,500 comments on Facebook in response to Netflix's announcement. Take a look for yourself and you'll see that they're decidedly negative. In an article yesterday, fellow Fool Anders Bylund asked readers if Netflix was shooting itself in the foot: 69% said yes.

The biggest change is that Netflix has gone from a value that's too good to pass up to one that at least makes people think twice. At most, the DVD-only plan delivers eight DVDs a month, which would be the same cost as Coinstar's (Nasdaq: CSTR  ) Redbox. And personally, streaming content still isn't compelling enough for me to consider paying for that alone.

Becoming the enemy
I'm wondering if this is a move toward Netflix becoming the next-generation cable company. The streaming business model is starting to resemble Comcast (Nasdaq: CMCSA  ) and Time Warner Cable's (NYSE: TWC  ) cable model, and that's a path Netflix may have to go down with tiered pricing. But these companies aren't usually favorites in people's lives, and Netflix is used to getting nothing but love.

The streaming cost is what may push Netflix to new pricing options as it adds content. Right now, the company can pay a fixed cost for content and leverage the current fast rate of subscriber growth to turn a profit. If people are indeed outraged and drop Netflix before the price increase, that would put a lot of pressure on the company.

As Netflix absorbs this PR blow, Hulu executives have to be grinning ear-to-ear as they consider what to do with the company. Unlike cable, the cord to Netflix is easy to cut, and customers may be willing to give Hulu a shot at winning their hearts. That could mean an added premium when Disney (NYSE: DIS  ) , Comcast, and News Corp. (Nasdaq: NWS  ) eventually sell the company.

You're not THAT important
I think Netflix is over-valuing its importance and value in people's lives.

I canceled my Netflix subscription a few months ago because I didn't see $9.99 as a great value after I got through the movies I wanted to see. DVDs were nice, but if I didn't watch them the day they arrived, I could only get through five or six a month, and streaming content was disappointing, to say the least. Right now, as much as I dislike XFINITY from Comcast, I would probably pay for that before Netflix, and Hulu isn't far behind.

My Foolish bottom line
Fellow Fools and our Stock Advisor team, which has been wildly successful with its Netflix pick, may disagree with my opinion on Netflix. But that diverse range of views is what The Motley Fool is all about. I would suggest investors take some, if not all, of their shares off the table after the recent price increase, because I think there will be a bigger-than-expected backlash.

Who is right? Netflix bulls have been leading the charge for a long time and we'll find out if that will continue in a few months, when third-quarter results are released. I made a bearish call on my CAPS page, and right now I like my chances.

Would you buy, sell, or hold Netflix considering the price increase? Leave your thoughts in our comments section below.

Interested in reading more about Netflix? Click here to add it to My Watchlist, and My Watchlist will find all of our Foolish analysis on this stock.

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

Motley Fool newsletter services have recommended buying shares of Walt Disney, Coinstar, and Netflix. 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.


Read/Post Comments (19) | Recommend This Article (13)

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 14, 2011, at 3:23 PM, N18996 wrote:

    Perhaps you need to broaden your viewing horizons. There's not much I can't find in the streaming content on NetFlix. DVDs are dead, dead, dead and it won't surprise me if they drop them altogether in less than 3 years. Physical media is a dinosaur wating for the asteroid to hit.

  • Report this Comment On July 14, 2011, at 3:24 PM, Gonzhouse wrote:

    The ultimate slam: suggesting Netflix is becomming like a cable company. If true, Big Red Thumb in Netflix future.

  • Report this Comment On July 14, 2011, at 3:33 PM, BioBat wrote:

    I agree with N18996 - there's plenty to watch with Netflix streaming, however I saw it as a nice add on in addition to DVD rentals (which I can get multiple seasons of TV shows, newer movie releases and a huge back catalog of movies unrivaled by anyone). As a stand alone service, I'm not certain it's worth $8 to me, particularly when I already can catch watch a lot of it (although not all of it) on Amazon with a Prime membership.

    From the DVD end - I don't think Redbox is threat at all. The choices at Redbox are awful. My local new releases include Animal ABCs and Big Momma. No thanks. The threat is and will come from Blockbuster who must be salivating at a chance to grab customers right now.

    Anyway, I said yesterday that if I had still been holding my stocks, I would have sold, sold, sold on the news without thinking twice. Sub numbers are going to drop THIS quarter and almost certainly next quarter and that's been the only thing keeping the stock in lofty valuation territory. This one's going to hit $200 before it hits $320.

  • Report this Comment On July 14, 2011, at 3:37 PM, SFLogic wrote:

    Everyone's forgetting that Netflix basically threw in streaming for free (maybe for ~$2 with the pricing changes last year). For anyone who doesn't just want big Hollywood releases, there is a decent amount of quality movies available for streaming. And, I'm assuming that now that they're actually charging something for streaming (same as Hulu, right?) they'll bulk up the selection. Relative to other monthly recurring costs most of us have (cable, smart-phone plan, etc.), $6 is small, particularly relative to the value.

  • Report this Comment On July 14, 2011, at 3:41 PM, MKArch wrote:

    Subs were already leaving in droves before this price hike and they had to be nearing saturation which would starve them of the hordes of new subs that have been masking their enormous churn problem. IMO a good part of this strategy was to muddy the waters regarding churn now that they are near saturation and sub count was going to decline anyway. They'll blame it on the new pricing model (only partially true) and suggest higher ARPU will make up for a declining sub base. Again only partially true and what does that mean for a stock trading at a gazillion times earnings?

  • Report this Comment On July 14, 2011, at 5:13 PM, mesConfitures wrote:

    We aren't interested in streaming, and are switching to one of the DVD-only plans, but probably one of the lesser plans than we have now.

    We were upset at the price increase months back, and were going to drop it altogether and sign up with a local rental shop that carries a great selection, but since it will mean a price decrease for us now, we'll probably keep Netflix.

    DVDs certainly aren't dead in my family, nor anyone I know, in response to those saying it's dead & done with. Not everyone has the setup to stream content, nor the desire to get yet another system bought & installed. We have a nice big-screen TV, and have no desire to stream movies onto our computers or phones. I doubt I'm the only one like this.

    And as to the expansion to the rest of the world, does the rest of the world have better bandwidth coverage than the US? I can't imagine countries paying for their internet on a per-usage basis are going to flock to stream movies.

  • Report this Comment On July 14, 2011, at 5:15 PM, cheflou74 wrote:

    How can you say subs will be down next quarter when they just picked up South and Central America. With streaming being the only option, expense should be minimal. I do agree the share price will go lower before it will go higher and I'm waiting to buy back in. I just ditched Comcast and have Hulu and Netflix steaming through my Xbox, that's the future. I sold at $295 with an original purchase of $30.

  • Report this Comment On July 14, 2011, at 6:18 PM, spike1299 wrote:

    If you are investing for the long term who cares!

    A bump in the road, doesn't mean the Grim Reaper struck, its a bump, you can sell off your holdings any time you want, but!!!!!!!! Short term happenings are just that, If you invest for the long term. Don't worry be happy.

  • Report this Comment On July 14, 2011, at 6:34 PM, rhugg wrote:

    Took my 100% profit yesterday and ran. When most of the subscribers to both services downgrade to only one (sept. 1) the stock will fall, fall, fall!!!

    Epic fail Netflix!

  • Report this Comment On July 14, 2011, at 7:42 PM, WelshAvenger wrote:

    I canceled both services after I received the announcement of the price hike. I don't feel like either offering is worth $8 to me with RedBox around the corner and the streaming's limited selection of new content.

    I would expect similar backlash from others as well. Netflix is a sell!

  • Report this Comment On July 14, 2011, at 8:14 PM, sailrmac wrote:

    Comparing Netflix to a cable company is exactly the point. How much do you pay your local cable company? I'm guessing its 3-10x what you pay Netflix. Netflix wants a bigger chunk and it's long term target is to become a replacement to cable, not an add on. It's making a bold and risky move in that direction.

    Risky because it could very well end up that revenue and profit decline in the short run. I for one decided I really don't care much about the DVD's, so my bill will be less.

    Netflix, particularly with it's streaming service, wants to make you wonder why you have cable. 80% of what I watch is via Netflix streaming, 15% cable, 5% Netflix DVD's. If I can get the same content through streaming and no comercials, bingo! bye, bye cable.

    By seperating streaming you are valuing one method of delivery vs. the other and letting customers decide. The increased streaming funds will be used to buy increased streaming content, if the customer is willing to pay for it. First run movie's and TV shows being offered via streaming. At the point you can get the content you recieve now via cable, through Netfix streaming, you are going to be wondering why you have cable. I already am.

    Disclosure: I am not currently a Netflix investor.

  • Report this Comment On July 14, 2011, at 11:41 PM, esxokm wrote:

    To be honest, I have no idea if this is a good or a bad thing for Netflix.

    However, I would simply say to those who hold positions in NFLX which are very profitable that now may be the time to take those profits and move on to the next growth company.

    I'm sure Netflix will be around years from now, but at what point will growth slow? Is now the time? Is the heyday over? Again, I have no idea. But content-distribution paradigms are changing so rapidly that one cannot accurately predict what will next be valued highly.

  • Report this Comment On July 15, 2011, at 7:11 AM, MrChapel wrote:

    Living in Europe, I'm waiting for the day Netflix will come here. HD network media players are big sellers here, both models with and without internal hard drives. Multiple manufacturers who bring out new versions at least once a year. Asus alone sells 5 different models!

    I just moved into a new apartment, where I pulled networking cable throughout the walls. In my previous apartment, I had to put it along the walls. Still, I had/have the following setup: NAS located in a closet, a Marantz stereo receiver/Logitech Squeezebox Duet combo in the home office, flatscreen TV/Duet/Media player/AVR receiver/CD/Bluray player combo in the living room. In the last year I've had the CD and BR player, I only used them three times. Everything else is being played across the network.

    I have almost all my CDs ripped to lossless format, same with my DVDs. I have only six Bluray discs that I need to rip still. The pricing on DVDs, Blurays and CDs is very expensive while the numbers being sold are dropping. Even the blockbusters like Avatar or Iron Man don't really do well when you put the numbers up to what they were five years ago. How else do you explain the studios putting out multiple versions of the same movie and adding a free DVD of the movie in the BluRay version? Or selling them through pharmacy chains on the first day of sale? Used to be you only saw a movie like one of the Harry Potters or other blockbuster for sale there after about a year. Now, even the special editions with all the extras and free DVD version are there.

    I'm 41. Most people my age or older will prefer the whole physical media thing. Witness the return of the turntable in home stereo. The younger generation, however? The ones growing up with their Iphones, Ipads, Macbooks, Android phones and tablets, Twitter and the current crop of gadgets and electronics? They prefer streaming. Buying movies and music online if they can, downloading through P2P networks or usenet if necessary. Netflix has seen that before anyone else and have acted accordingly.

    The number of people using discs to watch movies is dwindling. It is still a revenue stream but for how long? Better to separate it into two. We'll see which one will grow and which one will die within a decade or less.

  • Report this Comment On July 15, 2011, at 9:57 AM, russkr wrote:

    @mesConfitures:

    The argument that DVDs will not die because people, such as yourself, do not have "the setup to stream content, nor the desire to get yet another system bought & installed."

    This, to me, is surprising. It means that you either

    a) don't have a laptop/xbox/etc and HDMI cable; or b) have a very poor understanding of how simple and easy it is to stream directly to your tv.

  • Report this Comment On July 15, 2011, at 10:34 AM, David369 wrote:

    @MrChapel

    Good comments, I agree.

  • Report this Comment On July 15, 2011, at 10:43 AM, Seering wrote:

    All i care about right now is that

    1) Netflix made a deal to stop DVD deliveris of new releases as soon as they came out, and promised more streaming. Didn't happen. and they raised my rates...

    2) Now they raised my rates 60%!!!! Am i getting 60% more anything for my costs? no..

    In fact i am growing fustrated with Netflix and the streaming service. Quality is poor, and HD sound is still months if not YEARS away.

    Friend of mine told me Spartacus from Stars was a good show, and i should watch it. I pulled it up on Netflix. Only seaons two... What happened to Season one?? its gone. Few weeks later it came out but for DVD only. you can stream seaoson two, but not the first one...??

    I dont mind paying more, if i am getting more. I just dont see that happning here. Its very one sided. More money for less content with less quality.

  • Report this Comment On July 15, 2011, at 10:49 AM, TMFFlushDraw wrote:

    Thanks for all the comments everyone.

    It will be an interesting next few months for Netflix the company and the stock. I'm sure the debate will continue at least until 3Q earnings are released.

    Travis Hoium

  • Report this Comment On July 15, 2011, at 11:18 AM, ejclason2 wrote:

    For those that think that DVDs are dead ... not until there are close to as many titles available streaming as on DVD.

    I subscribed to Netflix, not because it was cheap or convenient, but because of there huge selection (long tail). I agree that the quality of streaming acceptable, but until a lot more title are available, I'll still be watching DVDs.

  • Report this Comment On July 15, 2011, at 2:57 PM, maxmattnyc wrote:

    it is shocking that in a country where a first run movie costs about $16 [to see ONE movie] that people are moaning about a service that even at $8/month for unlimited streaming is a great bargain. in the same vein, why is cable so damn expensive?

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