It's Decision Time for Netflix Subscribers

After weeks of customer grousing, Netflix's (Nasdaq: NFLX  ) new price increases have arrived. Here's why they won't matter.

It's not that big of an increase
If you missed the Internet rage, Netflix announced in July that it planned to restructure its pricing plans. The company now offers a one-DVD-at-a-time plan for $7.99 a month, or $11.99 for two DVDs at a time. The streaming-only plan remains $7.99 a month. Customers who want both DVDs and streaming will have to sign up for the plans separately, and access the Blu-ray discs still costs extra.

Many news outlets reported that the price could increase as much 60% for some customers. While technically true, that's also a tad overdramatic. Before the increase, unlimited streaming plus one DVD out at a time cost $9.99. Now, the same plan costs $15.98, a total increase of $5.99. For a month's entertainment, that's less than you'd would spend going out to lunch.

Actually, your service has improved
I know some people will object to a price increase of any kind by arguing that Netflix's service hasn't changed. Yet argument ignores the online library's expanded selection. Although it still lacks a lot of newer movies, its lineup is good enough for the service to stand on its own.

This isn't just my personal opinion. The company's data also shows a distinct shift toward streaming. In the last quarter, Netflix reported that 75% of new customers opted for the streaming-only plan. Meanwhile, the number of users who subscribed to hybrid plans, as well as the total number of DVD shipments, declined.

As for the lack of newer movies on streaming, I would argue that's not as important as some critics claim. TV shows account for more than half of streaming users' viewing hours, and the service has become the ultimate TV jukebox. If you compare the nominal monthly fee to what it would cost to actually purchase all those shows on DVD, the streaming subscription looks worth the price.

About the only thing that surprises me about the increase is that it took Netflix so long to say it would no longer give streaming service to DVD subscribers for free.

Where else are you going to go?
I also believe that Netflix will continue to grow because, at the moment, nothing really compares to its service. Coinstar's (Nasdaq: CSTR  ) Redbox could replace the DVD subscription, but you won't find the same vast selection. The online video stores offered by Apple (Nasdaq: AAPL  ) , Microsoft (Nasdaq: MSFT  ) , Sony (NYSE: SNE  ) , and Wal-Mart (NYSE: WMT  ) all operate on a pay-per-download model. Hulu boasts newer shows, but even the subscription service features commercials.

About the only credible competitor is Amazon's (Nasdaq: AMZN  ) free streaming for Prime members. And while Amazon may pose a threat one day, it has affected Netflix's business yet. Amazon has a smaller library and is available on fewer devices, so it has a lot of catching up to do.

Foolish takeaway
Obviously, Netflix will lose a few customers as a result of the price hike, but I think that will be a temporary dip. Even at the new rates, the service remains a great and unmatched value. After consumers adjust to the new plans, I expect that the company will return to its normal growth rate.

Want to keep an eye on how well Netflix fares with the new price scheme? Add it to your watchlist.

The Motley Fool owns shares of Microsoft, Wal-Mart Stores, and Apple. Motley Fool newsletter services have recommended buying shares of Amazon.com, Netflix, Wal-Mart Stores, Apple, and Microsoft; creating bull call spread positions in Microsoft and Apple; creating a diagonal call position in Wal-Mart Stores; and buying puts in Netflix. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Patrick Martin owns shares of Netflix. You can follow him on twitter@TMFpcmart03. 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.


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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 September 01, 2011, at 4:53 PM, TheeShawn wrote:

    If you think the streaming plan is a deal now for the options you get then cool. If you like watching old re-runs over and over because you're an addle brained tv addicted moron more power to you.

    For those of us who prefer new movies the DVD/BluRay option is the only thing worth subscribing to and the streaming was just a nice option to use a couple times a month. The on demand selection basically sux and is loaded with D grade movies.

    And how is a 60% increase overly dramatic? It's not just technically true, it is true. You "journalist" types use drama all the time to sell your wares and get people to tune in or read the article under your over the top headline.

    I also think your prediction of returning to normal sub addition rates is off base. They have a pretty high church as it is. For years I told everyone about how great a deal Netflix was. I do not and have not since they made the change. It's still a decent deal, but not what it used to be. Plus the company proved they bow to wallstreet over mainstreet, no problem making profit, you need that, but trying to maintain a growth rate for wallstreet bulls is a losing game imo. And the more filled the internet gets with on-demand streams, the slower and glitchier it will get.

    I cancelled over a month ago and won't be back until the streaming option includes new releases.

  • Report this Comment On September 01, 2011, at 5:19 PM, blobka wrote:

    I canceled too. Streaming selection is terrible. DVDs not much better. There is this thing called the public library which has tons of dvds, and you can reserve there too. Granted, some people will never set foot in a library. However, when the USPS cancels Saturday delivery service, Netflix's DVD-plan will suck, and it won't help when USPS removes the mailbox on the corner of your street either.

  • Report this Comment On September 08, 2011, at 9:21 AM, chadscards1274 wrote:

    Wow, okay so 3 comments before this, one person suggesting an internet service that I've checked out and haven't been impressed with. The other two don't seem to know what is actually available in the streaming catalog. The streaming only option at $7.99 is what my wife and I just switched to. Honestly the DVD plan was great before the price hike but now it's not worth the extra $7.99. I honestly think most of the new subs will opt for streaming only. Where the TV shows and movies are concerned there are great movies that have come out in just the last several month in the streaming library. In addition on the TV side there are shows like Greys Anatomy, Desparate Housewives, American Pickers, Hoarders, Say Yes to the Dress, etc. so we aren't talking just "old re-runs". Oh and seriously the library? That is just funny, if you think the NFLX DVD selection is bad then the library is worse.

    Seems to me their sub growth will slow down (unless the streaming content catches up to what the streaming and DVD plan used to be), but the comment about NFLX having high churn is just not accurate. NFLX churn last I checked was in the 3-4% range. I agree with the author that AMZN represents the biggest challenger to NFLX the question is whether AMZN will be willing to pay up for all of the deals necessary to match or get close to matching NFLX catalog.

  • Report this Comment On September 09, 2011, at 5:29 PM, ejclason2 wrote:

    I didn't wait, I dropped my Netflix service back in July. Truth is, I haven't replaced it fully, I am getting some video from sources I ignored when I had Netflix. But I am watching less video (and spending less on video).

    Would I come back? If either 1 of 2 things happened:

    1: Netflix offered a discount for people who subscribe to both DVD and streaming service. It doesn't have to be as large as the implied discount of the previous pricing system. But there is a lot of room between that and the current no discount pricing system.

    2. Netflix's streaming service had selection in the same ballpark as their current DVD selection.

    Basically I want my cake and to eat it too. I want huge selection (this is why I signed up to Netflix in the first place), but I also want the convience of streaming. When I can get them both without having to pay 2 prices, I will happily resubscribe to Netflix or whoever else.

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