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.
- Add Wal-Mart Stores to My Watchlist.
- Add Sony to My Watchlist.
- Add Microsoft to My Watchlist.
- Add Coinstar to My Watchlist.
- Add Amazon.com to My Watchlist.
- Add Apple to My Watchlist.
