Following a difficult 2011, Netflix
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
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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Fool contributor John Grgurich still enjoys the ancient practice of browsing actual books on an actual shelf in an actual bookstore, but owns no shares of any of the companies mentioned in this column. The Motley Fool, however, owns shares of Amazon.com and Apple. Motley Fool newsletter services have recommended buying shares of Amazon.com and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. 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 scintillating disclosure policy.
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