Editor's Note: A previous version of this article understated the number of streaming subscribers. The Fool regrets the error.
Something's afoot at Netflix (Nasdaq: NFLX).
Over the weekend, tech blog Engadget uncovered a disparity in pricing plans being offered to potential customers.
Using different browsers, computers, and locations, Engadget's Sean Hollister unearthed Netflix pitches for disc-less streaming plans at $7.99 and $8.99 monthly price points.
Yes, Netflix testing out an unlimited streaming plan without DVDs is news in of itself. It's not necessarily a surprise since it launched a similar plan in Canada last month, but it's noteworthy.
However, the real interesting point for shareholders -- since "streaming only" plans are likely to be a hard sell -- is that both of the trial balloon plans point out that DVDs can be added, starting at $9.99 a month.
Wait a minute! Isn't Netflix currently offering a monthly $8.99 plan that includes both unlimited streaming and disc rentals -- with one DVD out at a time? Yes. It seems as if Netflix isn't just gauging the market's interest in a disc-less plan. We may very well be seeing Netflix in the early stages of trying to push a rate hike across.
Bucking the trend
"It's about time," investors can argue.
Over the past few quarters, subscriber growth has outpaced top-line gains. Netflix is generating less revenue per account, and the obvious explanation is that folks have been gravitating from its flagship $16.99 plan that comes with three physical rentals at any given time to the $8.99 plan that also offers unlimited streaming but with only one DVD out at a time.
Netflix has kept its plan prices largely intact after slashing them several years ago. It seemed necessary at the time. Blockbuster and Wal-Mart (NYSE: WMT) were gunning for Netflix's model, and there were rumored rumblings of Amazon.com (Nasdaq: AMZN) entering the market.
Wal-Mart bowed out at the first whiff of a price war. Amazon turned its attention to Europe. Blockbuster was pesky for a while, but fiscal responsibility found it moving away from aggressive pricing -- and fiscal irresponsibility found it filing for bankruptcy reorganization this summer.
In short, Netflix is the runaway leader in this surprisingly barren niche. It owns this space with 16.9 million subscribers. Its guidance calls for it to close out the year with as many as 19.7 million couch potatoes aboard.
If it ever wanted to raise prices, now would seem to be the right time. It is not contractually obligated to shackle itself to any particular price point, the way that Sirius XM Radio (Nasdaq: SIRI) is two years into a three-year rate freeze mandated by the FCC.
Two-thirds of Netflix's subscribers are now taking advantage of the unlimited streaming that it offers members at no additional cost. Churn is at a historical low. The recession appears to be fading in the rearview mirror. If it could ever pull off a margin-widening pricing increase, now would seem to be the perfect time.
Or is it?
Streaming barbarians at the gate
After letting Netflix run away with the unlimited streaming model for three years, the likely competitors are finally getting antsy.
Coinstar's (Nasdaq: CSTR) Redbox promises to reveal its digital strategy this month -- which likely means an announcement come Thursday night along with its latest quarterly report.
Amazon.com dodged questions during last week's conference call, but played with analysts along the way. "There is room for a lot of innovation," CFO Tom Szkutak said, without speculating in public as to what his company's next move will be.
Then you have tech darlings Apple (Nasdaq: AAPL) and Google (Nasdaq: GOOG) hoping to make a splash this holiday season with their Web-tethered set-top gadgets. If either one succeeds in the living room -- clearly not a given since Apple TV has stalled in the past and Google is running into some serious resistance from major networks -- what's to stop either company from rolling out subscription plans?
Apple runs iTunes, the leader in piecemeal video rentals. Google owns YouTube, the world's top video-sharing website.
In other words, Netflix may want to tread carefully here. Raising the price of its entry-level unlimited plan by a buck is unlikely to be a deal-breaker, especially if it's limited to new subscribers. If anything, churn should improve dramatically if existing subscribers know that the plan will cost more if they cancel and renew later.
However, despite its gargantuan lead, Netflix can't assume that it has ridiculous pricing elasticity beyond that. A few months from now, this should be a far more competitive market than it is today.
How high do you think Netflix can raise its plan prices? Share your thoughts in the comment box below.
