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:
