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Following a difficult 2011, Netflix (Nasdaq: NFLX ) has come off the ropes swinging into 2012, debuting its as-promised UK and Ireland streaming service at a per-month fee that has already started a price fight with Amazon.com (Nasdaq: AMZN ) . Who will come out on top in this race to the bottom?
We like paying a lot
First, take note that in the U.K. and Ireland, as opposed to in the U.S., Amazon is the established content-streaming service and Netflix is the challenger. Netflix has priced its new service at $7.65 per month for unlimited streaming, prompting Amazon to cut the monthly service fee for its unlimited streaming package, known in the U.K. as "Lovefilm," back to $6.34 per month.
Netflix also announced that the company is prepared invest several billion dollars in new content deals to challenge Amazon, and added that the cost of entering the U.K. market will push it into a loss in the first quarter of 2012. Netflix’s chief content officer, Ted Sarandos, told Financial Times that licensing costs in the U.K. were "high relative to the size of the market" but that more shows would come online over the course of the year.
He added, however, “I don’t mind that it’s not easy to get content because it creates some barrier to entry for others."
Give 'em the old one-two
We know one economic entity sure to come out of this pub brawl a winner: the Irish and U.K. consumer. As for the companies involved, the per-month prices are likely not sustainable in the long run, but the strategy is a timeworn and potentially successful one in the short run.
That is, break even, or even take a loss up front, on your product or service to get the paying customer hooked on your system, and then slowly but surely raise prices back to where you're actually making a profit (which is the point of running a business, after all). Barnes & Noble (NYSE: BKS ) is currently embarking on a similar strategy against Amazon, deeply discounting its Nook e-readers in an aggressive bid to turn consumers away from Kindles and capture as many customers as possible before a commitment is made to Amazon.
A good beginning for 2012
Putting into that context, then, engaging in a temporary price war could be considered good strategy on Netflix CEO Reed Hasting's part. International growth is essential for the company's future, and this is one way to get into what is the next natural market for the company. Netflix has already moved into Canada and Latin America, but didn't have to resort to price wars there since the competition wasn't so fierce in either region.
After the company stumbled so severely in 2011, with a wildly unpopular 60% price hike and an even more wildly unpopular attempt at splitting off and rebranding its DVD-by-mail service, Netflix needs to regain the initiative and rehabilitate its image this year, in the consumer's as well as the investor's mind. So far, it's off to a good start.
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