Stand still for a sec while I draw an entrepreneurial chef hat on you.
Let's say you have a restaurant. In order to promote your new line of desserts, you begin to include the tasty treats with every paid entree at no additional cost.
The move is a hit. Patrons begin lining up to eat at your place, and the bonus finishing touches are a major reason for your success. Your dessert menu is limited, but the value proposition is too rich to ignore. You're a recessionary darling, and folks that don't normally even order sweets after a meal can't ignore your simple appeal.
Rival restaurants aren't pleased with your success. Pastry chefs argue that you have devalued their craft. Cynics argue that your "free" desserts aren't as fresh as the premium delicacies that can be found elsewhere. It doesn't matter. Success is the ultimate scorecard, and you have 23 million people happy to crack the burnt sugar shell of your day-old creme brulee.
After a few years, you get cocky. You begin selling your desserts in Canada, and you see that they're willing to pay as much as some of your cheaper entrees for your piecemeal treats. Your desserts have ridiculously better margins than your entrees, and they're also easier to prepare.
You decide to make the biggest gamble of your life. You shave a couple of bucks off your entrees, but the desserts are no longer free. You want people to pay for dinner and a pricey desert, but in reality you just want them to come for the sweet stuff.
In a perfect world, you would change your name to Just Desserts and only sell the high-margin treats that you were practically giving away for years.
Your name is Netflix (Nasdaq: NFLX ) , and I think you better think twice before you invest in more dessert spoons.
No thanks, I'm stuffed
Netflix's decision is brazen, but not as bright as it -- and some bullish analysts -- think it may be.
Goldman Sachs analyst Ingrid Chung sees most of Netflix's subscribers staying put. She feels that those on plans that include two or more discs out at a time will simply absorb the $6-a-month hit and move on. The real churn will take place at the entry level, and even there she still sees two-thirds of those penny-pinchers opting to pay for the "streaming only" at $7.99 a month, with the other third paying $7.99 a month for the DVD plan.
Piper Jaffray's Michael Olson also believes that splitting the plans will accelerate Netflix's streaming service. Merrill Lynch's Nat Schindler also feels that the move will eventually find DVD renters migrating to Netflix's streaming service.
In short, they see this as a joyous occasion.
Forget the restaurant. Let's view this as a couple splitting up. Mom and Dad are getting divorced; who will their kids choose?
Right off the bat, that's probably the wrong question to ask. A better query would be: Are the kids happy?
In Netflix's case, they're not.
Audiences are rumbling
In a TheStreet.com poll, 53% of the nearly 4,700 voters (as of last night) claimed that they would quit Netflix altogether. An additional 38% argued they would trade down to either streaming or DVD.
In a slightly larger HackingNetflix.com poll, 34% of the 7,800 respondents indicated they would be ditching the service. A mere 20% would stick to the current plan that offers a combination of optical discs and streams.
It goes without saying that these straw polls are highly unscientific. They tend to bring out bigger complainers, so they're not indicative of Netflix's audience as a whole. The real test will come in two months when the pricing goes into effect for existing subs during the September billing cycle. Even most of these poll voters that bent on bailing are likely to stick around.
However, I don't tend to agree with the popular thinking that those choosing between the two options will stick to the streaming plans. The digital catalog is woefully incomplete, and that may never change.
This isn't an immaterial price hike. It's the kind of seismic shift that may reverse the cord-cutting fears that cable providers have been fearing. Perhaps that's why Comcast (Nasdaq: CMCSA ) (Nasdaq: CMCSK ) -- the country's largest cable company -- had no problem having its majority-owned NBC Universal renew its streaming deal with Netflix the day after the announcement.
Shares of Netflix may have inched higher yesterday on the pricing news, but why did Blockbuster parent DISH Network (Nasdaq: DISH ) and Redbox parent Coinstar (Nasdaq: CSTR ) also rise higher than the general market? It could be that the market feels as if the pricing elasticity of video rentals is improving or -- more likely -- that these are the companies that will be there to catch the Netflix defections.
I hope Netflix knows what it's doing, but I keep thinking that the one thing that this will do is grind the digital streaming revolution to screeching halt. Couch potatoes will regress back to optical discs.
The future will be the past, and Netflix's dreams of chunky margins through streaming will fall right through the burnt-sugar shell of a clumpy creme brulee.
To DVD or not to DVD? Will you be sticking to DVDs, streams, or both when the Netflix hike kicks in? Share your thoughts in the comment box below.