Like the old commercial that asks consumers to choose between beer that's "less filling" or one that "tastes great," Netflix (NASDAQ:NFLX) is a conflicted company caught between being affordable and one that can offer better content.
At just $8 for its streaming service, viewers are treated to a massive though somewhat dated library of films as Netflix reserves virtually all of its newly acquired content for its DVD rental business.
An analyst at Wedbush Securities says the movie house has to make a choice if it wants to grow: either stagnate with its current pricing formula or increase profits by raising prices and use a portion of the money to acquire current content. Of course, we know what happened the last time Netflix raised its prices.
According to a Wedbush survey, subscribers are currently relatively happy with Netflix's price-to-content quality ratio, but, like me, the lack of new movie fare on its streaming side means that ratio is falling. I imagine the situation in my household is similar to that found in some others: There are multiple avenues of viewing opportunities available, including Netflix, cable pay-per-view, Redbox rentals, and even Hulu, Vudu, and a bunch more through my Blu-ray player and Roku box.
Even though Netflix adds new movies, because much of it isn't current, it gets shoved to the back of the queue line more frequently. Although I'm also considering a trial with Outerwall's (NASDAQ:OUTR) new Redbox streaming service, I think the Verizon (NYSE:VZ) partnership will suffer from much of the same shortcomings as Netflix.
Which brings up the point the Wedbush analyst made. It could vastly increase the quality of its content by paying movie studios more money to get more current selections, but that would necessitate it raising prices. When Netflix bifurcated its movie business between DVDs and streaming, effectively raising the cost for viewers, some 800,000 subscribers dropped the service.
I'm sure more than a few of them were like me and reluctantly came crawling back, but I'm not so sure the Wall Street analyst is right that Netflix would suffer a similar exodus if it raised prices again.
Previously, the outrage was over having to pay for something (streaming) that had been free, but now those subscribers who are with the service would simply be paying up for something better than what they're getting now. I think that's an easier hurdle to get over than the situation Netflix faced before.
We see it all the time where service providers are able to incrementally raise prices without alienating much of their subscriber base, sort of like the old analogy of the boiling frog: We'll allow ourselves to be slowly cooked alive if you turn up the pricing heat slowly over time. It's the radical changes like a major spike or charging for heretofore free services that have us jumping out of the pot.
To be fair, what the Wedbush analyst is saying is that for the movie king to justify its current valuation, it needs to be more profitable and that necessitates nearly doubling the subscription rates it currently charges. But to do so, it would also need to increase the quality of the content it offers, which might stem some of the outflow of subscribers that hiking subscriptions like that would normally engender.
Because not even its original programming is enough to make the service a keeper. Unlike Time Warner's (NYSE:TWX) HBO service, which owns the rights to The Sopranos, Boardwalk Empire, and its other original shows, Netflix only has temporary rights to House of Cards, Arrested Development, or its nearly unwatchable Hemlock Grove. If it wants to rebroadcast them after a few years, it will need to pay for the privilege.
It's tough to say whether I'd be willing to pay $15 a month for Netflix's streaming service considering there are so many alternatives out there, though when you stack it up against the cost of a movie ticket these days -- and the fact that you're able to view an unlimited number of movies for that one price -- it is still a bargain. And if it was done incrementally, going to $10 or $12 first, I might allow myself to be boiled alive.
Despite the numerous critics, Reed Hastings has proven to be a pretty canny reader of consumer desires, and though the way Netflix handled the change to its streaming service before led him to ultimately apologize, it was the right move and I'm pretty confident Netflix will navigate this next chapter fairly adroitly as well and justify its valuation, too.
Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Netflix. 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 disclosure policy.