A Very Special Roundtable: Netflix Price Increase

When Netflix (Nasdaq: NFLX  ) split its service plan into separate DVD mailer and streaming charges, the Internet flooded with angry diatribes even as Netflix stock kept climbing. We've covered the reasons for both reactions here at the Fool, but not all in one place. So I thought I'd drum up a roundtable of experts to look at the issue from all sides.

Fighting my way through hordes of chirping crickets and an avalanche of tumbleweeds, I'm here to do it all. I asked me, myself, and I what the move really means to Netflix investors.

Angry Netflix bear Anders Bylund
It was bad enough when Netflix jacked up the basic one-DVD-at-a-time plan by $1 a month last winter. That was an 11% rate increase for exactly the service I had before, which doesn't make any sense. This time, the increase jumped to 60% and again we get nothing new for the higher price. And you wonder why I'm angry?

It's nice of them to send out an email to warn about the changes, I guess. In fact, that mail was very helpful as I was reminded that "You can easily change or cancel your unlimited streaming plan, unlimited DVD plan, or both." So I guess I'll take my streaming dollars to Hulu or Amazon.com (Nasdaq: AMZN  ) , or a combination of both, and fill out my DVD needs by hiking to the nearest disc-vending machine. Coinstar (Nasdaq: CSTR  ) should thank Netflix for the extra Redbox business, and Blockbuster owner DISH Network (Nasdaq: DISH  ) just launched a special trial offer for disgruntled Netflix refugees.

Netflix will lose subscribers by the millions virtually overnight. Look out below whenever management gets around to disclosing the damage.

Happy Netflix bull Anders Bylund
Call me naive, but I don't think $6 a month is that big of a deal even in this cash-strapped age. Netflix will benefit from both the extra cash from all-out adopters and the definitive split-off of customers who see value in only one of the two halves.

Let's assume that many clients cancel their DVD plans and remain streaming customers, as Netflix clearly hopes. That would reduce the low-margin portion of sales, raising gross margins and giving the company more flexibility to pump money into better streaming content deals.

Comcast (Nasdaq: CMCSA  ) subsidiary NBC Universal reupped its Netflix licenses the very next day, for example. Maybe NBC wanted Netflix to break streaming apart from DVD mailers in order to base license agreements on easily understood hard data. Perhaps they simply asked for more money, forcing Netflix to pass the costs down the line.

Either way, I'd expect more announcements like that from the other big dogs of Hollywood. When Walt Disney (NYSE: DIS  ) or Sony (NYSE: SNE  ) joins the party with direct deals that don't include intermediaries like Starz, you can point to this move as a catalyst. And that's the best way forward.

Netflix spokespeople say it expected this reaction, and is telling complaining customers that they should simply cancel service once the new prices take effect in September. Something tells me that the new structure will have led to some very significant announcements by then, and that Netflix hopes to hold onto its streaming business by improving the service. Watch the company closely and hold that thought.

Anders Bylund, logic-fanatic, Vulcan
This backlash is highly illogical.

If you really want to save money, it's easy enough to pick one plan or the other and save that way. If the same red mailer has been sitting atop your DVD player since February, just cancel the DVD plan and enjoy the streams. If you can't figure out how to make your favorite set-top box connect to the online service, then by all means save the streaming premium and just keep ordering discs. It's not rocket surgery, people.

For those who say they were on the verge of cutting the cable cord until this happened, I have to question the thought process. Would you really keep paying upward of $100 a month just to protest a $6 price increase?

A tsunami of cancellations may come at first, only to be reversed when we realize how hard it is to match the value and convenience of a Netflix subscription with a cobbled-together basket of alternatives:

  • Hulu Plus costs $8 a month, just like Netflix streaming.
  • Blockbuster's 1-disc-at-a-time Total Access offer doesn't include streaming content and costs $10 a month; the quick in-store exchanges and other perks only make sense if you drive by one of their stores every day. Time is money, and gas isn't free.
  • And then you'd have two accounts to maintain and access rather than a single point of entry.

Foolish synthesis
All these arguments make sense, depending on your assumptions and point of view. If I missed your favorite argument for or against this rate change, feel free to complete the picture using the comments box below.

Here's a roundup of Foolish analysis of the situation, including some from analysts not named Anders:

Fool contributor Anders Bylund owns shares of Netflix, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Coinstar, Amazon.com, Walt Disney, 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 (18) | Recommend This Article (9)

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 15, 2011, at 11:51 AM, TheeShawn wrote:

    I just switched from Netflix to Blockbuster, same DVD/BluRay price with additional option of video games if so inclinded.

    Streaming content wasn't all that, only used it maybe 2-3 times a month.

    Bye Netflix, so much for being a deal I couldn't refuse.

  • Report this Comment On July 15, 2011, at 11:56 AM, Metrobank wrote:

    You don't factor in the fact that the streaming service has a very poor group of films to watch and they haven't upgraded the library you can watch.

    Why is the company messing with its core customer base at a time it will incur higher expansion costs for an unknown foreign revenue stream? They are making too many changes without understanding the impacts of all their strategic moves. All this and an 85 pe ratio. Gee...sounds like a plan for disaster.

  • Report this Comment On July 15, 2011, at 12:18 PM, Spectrepilot wrote:

    Anders is overlooking two very important factors in the Netflix backlash that go far beyond the cost of a latte, loyalty and principle.

    Prior to this debacle Netflix was seen by many its customers as an oasis in the desert of digital entertainment. Disfranchised by the hubris with which Blockbuster approached the business model and its customers, we switched to Netflix by word of mouth in numbers that ultimately helped the little David company from California slay the rental Goliath Blockbuster in a battle that reshaped how we acquire and view entertainment. Now that word of mouth will slowly bleed a devoted customer base.

    The first price increase a few months ago got our attention, but in truth is was expected given the cost Netflix will most certainly encounter as they attempt to bring more content to their customers. I grumbled a little but it made sense and I knew it was still a great value for the money. The new price increase is far more than a small increase to cover content costs, this is about milking large profits out of a very loyal customer base. The cost of the plan I prefer (one DVD and unlimited streaming), will rise an incredible 60%, with no requisite increase in service. What makes it even worse is the cold-blooded way they are approaching the increase. With only a six week sanctuary for existing customers and cold-blooded “we expected this type of response”, Netfix has instantly gone from a fan favorite to corporate pariah.

    I also take exception to his assertion that most will switch to the stream only option…quite honestly that would be a foolish decision and I will not because the content library is atrocious. For me the best return on my investment is Hulu + and a stop at the Redbox I walk past everyday on my way to work.

    This has been a sad week, not because a company wants to raise the price of my service by a latte, but because they broke a trust and faith I had and replaced it with corporate greed. I had hoped 24 hours of outrage would convince them they made a mistake, instead the corporate machine remains stone faced as we cancel our subscriptions en mass, at least we can afford a few extra lattes.

  • Report this Comment On July 15, 2011, at 12:23 PM, wrtraxler wrote:

    Obviously the author does not use the streaming part of Netflix much. At a cost of $7.99 a month for Netflix steaming you get no new movies and what movies are offered are older ones. The DVD side you get access to everything, this makes no sense.

  • Report this Comment On July 15, 2011, at 12:34 PM, BioBat wrote:

    Netflix is an ok substitute for cable but let's stop the $100 for cable argument. Most cable plans will run $50-75. Yes, that's more than $16 per month but it also includes live sports and up to the minute broadcasting. Netflix doesn't.

    What nexflix also no longer has is the best value in the entertainment business. Amazon instant video is now cheaper (albeit with a more limited selection) than Netflix streaming. Blockbuster by mail is the same price if you prefer BluRay AND you get video games included. There is simply nothing that differentiates Netflix from its competitors anymore. That's going to be a dead stop to hypergrowth.

  • Report this Comment On July 15, 2011, at 1:03 PM, Borbality wrote:

    I'm not sure why everyone claims the Instant Watch movies are lame and "haven't been updated."

    They're adding more and more stuff every day and the quality is getting really good, too. The "HD" streams are starting to look as good or better than DVDs.. And they got WHOLE TV shows on there.

    For someone like me who won't pay for cable, and hasn't watched much TV at all over the last 10 years. netflix is the only way to go (as a consumer).

  • Report this Comment On July 15, 2011, at 1:06 PM, Borbality wrote:

    Also have to say as long as new HDTVs and Blu-ray players have built-in Netflix applications and nothing else, I won't be switching for a while. My blu-ray player was $80, and streams Netflix like a charm to my 42 inch TV. I'd have to buy a new device to switch to anything else.

  • Report this Comment On July 15, 2011, at 1:06 PM, johnnyluvsbeachs wrote:

    I'd be interested to see valuation models of NFLX if (and when) they were to completely get out of the physical DVD business.

    Add a dose of potential improved content in the future on the streaming side and this may be one heckuva temporarily image-tarnished diamond.

  • Report this Comment On July 15, 2011, at 2:18 PM, kwill10 wrote:

    I dropped to streaming-only, but I'm hardly the typical Netflix watcher (daughter's TV shows are streamed daily at our house, whereas we had a DVD for months without ever bothering to watch). I don't see people flocking in hoardes to streaming-only at this point unless they're a fringe user like me. It's a dangerous game, expecting people to pay for streaming-only so that you can make streaming-only something for which many will want to pay.

    My biggest beef with Netflix's decision from a business perspective is that they lost a competitive advantage. The limited streaming selection's not a big deal when you can add those missing selections to a DVD queue for only a couple of bucks a month. Make it $8 a month, though, and Redbox looks better and better as a DVD source. The streaming-only side is in competition with Amazon, YouTube, Hulu, etc. already, and much of the competition has deeper pockets should this strategy prove to be highly profitable. I don't see how Netflix emerges the winner here, yet it's priced with a lofty valuation expecting future growth to be strong.

    Red thumb, meet Netflix.

  • Report this Comment On July 15, 2011, at 4:59 PM, richleaves wrote:

    I always hated waiting 28 days for a new release, after 28 days its not new anymore. Netflix is 7.99+2.00 for blueray= 9.99. Thanks to the new price at blockbuster for netflix customers, I'll go there.

    The quality of Blueray over streaming is something streaming can't touch, at least yet.

  • Report this Comment On July 15, 2011, at 5:25 PM, ejclason2 wrote:

    The reason I was a Netflix subscriber was their large selection of DVDs (long tail). Nobodies (Netflix included) streaming content comes close to Netflix's selection of DVDs, yet. If I had stayed with Netflix, I would have dropped the streaming. But I think the content available on streaming will improve with time.

    If Netflix had offered a discount to those with both a streaming and DVD subscription, I would not have dropped my subscription. After all, a 2 DVD subscription does not cost twice as much as the 1 DVD subscription. Why can't they offer the same sort of discount when adding a streaming subscription.

  • Report this Comment On July 15, 2011, at 5:27 PM, dandles2020 wrote:

    It's not a 6 dollar increase, it's a 50 percent increase. If you're on the two disc or three disc plan, fine, you can drop down and still have a comparable service. But the one disc plan leaves you nowhere to go, you either lose streaming or discs.

    I cancelled completely. Maybe I'll go back, but I probably won't. I resent giving my money to a company that jacks up their prices by that much.

  • Report this Comment On July 15, 2011, at 7:45 PM, racchole wrote:

    It doesn't matter what the consumers think. Netflix knows what's up, and they know what they are doing. It is only a matter of time before all streaming services are forced to charge more money to legally obtain licensing on movies. Everyone who is targeting their rage at Netflix is going to realize they were wrong about Netflix, and that the rage should be thrown at Hollywood. Overcharge for movies and this is what happens. Netflix is smart. They will survive and thrive.

  • Report this Comment On July 16, 2011, at 1:37 PM, Indianagol wrote:

    "It's not rocket surgery, people."

    I see what you did there.

  • Report this Comment On July 18, 2011, at 9:55 AM, mgjr73 wrote:

    We've already decided to cancel our subscription for now. I'll settle for Redbox and our local library for our DVD fix. We have cable but we don't watch much TV anyway, we're just waiting for our contract to end and we'll do away with that too. That leaves streaming... I'll probably reconsider down the road when I hear that the selections get better.

    Netflix is really hoping to move everyone to streaming. Imagine what that would do with the overall internet bandwidth... supply and demand will dictate an increase in Internet Service Provider prices so it will be a double-whammy for the consumer. The consumer will eventually have to pay for higher price for streaming services AND monthly internet bills.

    Can't blame Netflix though when their philosophies have shifted from pleasing its loyal customers to pleasing their stockholders. I understand there's a cost to doing business but if I pay my executives 6 to 7 figure salaries, I expect them to be a little more creative than the average corporate officer and bring that to the negotiating table with the studios instead of taking the path of least resistance by angering "a few" customers and passing them off as "acceptable" losses.

  • Report this Comment On July 18, 2011, at 3:44 PM, dlchase24 wrote:

    I'm likely not going to drop Netflix over this increase, but they have caused me to consider other options. I think that's a mistake.

    I also think the splitting of services shows they grossly underestimated the popularity of DVDs when they introduced the streaming only option. They should have correctly set the price then instead of only a few months after the last price increase. I joined a year ago and since then my cost has increased 77% with no apparent increase in service. $7 isn't a lot, but when you start at $9 it makes you wonder what's going on and consider alternatives.

    My biggest complaint is the lack of transparency. Anders mentions an email was sent, but I never received it. Now that could be due to an overzealous spam filter somewhere in the pipes, so I don't want to appear to rash here, but I didn't like finding out about the price increase through rumor via the internet. This complaint was magnified last night, however, as I couldn't get streaming to work or access to the site. How about something on the site just saying, hey, we're having trouble, instead of me having to search and ask on the internet?

    I like Netflix, I think $16 a month is a good deal. It's just not the no brainer it was when I signed up a year ago.

  • Report this Comment On July 20, 2011, at 9:23 AM, BioBat wrote:

    dlchase,

    Good point on the Netflix outage. By my accounts, that's the 3rd or 4th one in the past 6 months. I can't remember it happening at all prior to that (I've been a Netflix subscriber for about 2 years).

    I got the e-mail from netflix as well and my first reaction was to cancel immediately. Now I think I'm just going to put my account on hold indefinitely (apparently they keep your queue's for 2 years if it goes on hold), get DVDs from my local library and quite probably Blockbusters by mail plan (new releases, video games and BluRay for $10), streaming from Amazon (I have a free Prime membership through the end of the year) and Hulu.

  • Report this Comment On July 20, 2011, at 7:17 PM, sunnyca101 wrote:

    July 2011 Price hike announced

    Downgrading my rating for Netflix from a 8 to a 2

    Take1: 60% price hike for the same service. Wow! Talk about Greed.

    Take2: One-Fifth (20%) the selection in Streaming (compared to DVD) for the same price, and the selection not as current as the DVDs. Five Wow's!!!. That equates to a 500% price hike when content to price factor is used.

    You just lost a customer. Netflix is just another "want" rather than a "necessity".

    where "want" equals

    http://en.wikipedia.org/wiki/Need

    or

    http://www.jstor.org/pss/4224746

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1519806, ~/Articles/ArticleHandler.aspx, 10/25/2014 1:13:00 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement