Netflix raises prices and the internet gathers their pitchforks

Evil Capitalists?

Today Netflix announced a rather drastic change to their pricing schemes which in essence separates out their streaming from their DVD rental. The original pricing for one DVD and unlimited streaming was $9.99 a month. If we can all hold off from lighting the effigy yet, I think we can probably realize that it was a pretty good deal. Seeing how recent reports show that Netflix accounts for upwards of 25% of all North American downstream bandwidth during peak hours, I can say with confidence that we were getting our monies worth. Then top that off with the fact that you get unlimited DVD’s, one at a time of course, for only an added $2. If you’re reasonable you could easily get about 3 DVD’s a month, but based on numbers, Netflix sends out about 1 million DVDs a day. At almost 26 million subscribers we are averaging a little more then 1 DVD a month, so the average cost for rental is $2 per DVD with no late fees. So, at this point we are looking at paying $8 a month for access to thousands of titles which we watch at huge numbers and $2 a month for renting hot off the shelf DVDs which due to licensing reasons I don’t care to get into here are not available right away on streaming, if sometimes ever.

So why the sudden price increase? As of 2010 Netflix has 20.1 million subscribers and revenues around $2.6 billion. That sounds like a lot and don’t get me wrong, it is, but with a payroll that includes over 2500 employees, mailing costs, supply, marketing and their newly found development and content costs, their profits are shrinking. The estimated new content costs in 2011 are in the hundreds of millions. With their new acquisition of “House of Cards” the hour long Fincher drama, the expected costs are somewhere between $2 and $4 million per episode. The actual number is unknown, but the original rumor was $100 million (which Netflix has refuted as being too high). Granted, Netflix brags about traditional marketing costs being non-existent for their new content, it goes to show that they will still have to market their service in general and this new Fincher series will be included in that promotion, saying that all they have to do is put it on the service and nothing else is a bit naive at best. Whether we like it or not content costs money. The puzzle this entire time that we talk about a lot on the site is how can we as consumers get access to the content we want without crying a little every time that cable bill hits our mailbox. A-la carte via a service like Amazon hasn’t taken off like hot cakes yet and Netflix has. They are flexing some capital now on trying to attain new content and want to make that back. Mark Cuban warned that this would happen but I’m not predicting Netflix’s demise yet. I think once the commotion settles down, people will still find value in Netflix, whether it’s DVD and streaming or one or the other may remain to be seen, but I dont’ think this will cause people to flood out of the building.

So Netflix is spending money, what’s my point. We’re all still standing around with molotov cocktails in our hands waiting for the signal to throw right? My point is this, cable’s costs can be anywhere from $50/month  for the lowest level of service and as high as $100/month if you want premium services. If we want a service to remain commercial free and continue to grow with more and better content, then the golden age of $10/month for streaming and DVD’s by mail would have to come to an end at some point. If you want to keep your DVD’s coming, then your costs will go up to $15.98/month for that service with streaming. If you, like many, sit on the DVD that you get in the mail and hardly watch one a month let alone multiple DVDs, then I would suggest dropping that service and staying with the streaming at $7.99 a month alone. That’s right, with all the hub-bub about price increases and Netflix screwing you, they aren’t actually raising the rates of streaming. They are just seeing an area they think they can capitalize on by charging you full price for both services instead of a discounted rate for one. You can talk with your feet and head to Redbox or you can step up your DVD watching game and start getting through those DVDs at a quicker clip.

I for one will most likely stay with both the DVD and streaming services. There are a few reasons for this. The biggest is that I don’t totally trust the Redbox service yet. Call it old school, but there are some pretty simple means of hacking those things and I don’t generally like sticking my credit card into a vending machine anywhere, let alone a box sitting outside of 7-11. The second is that with the costs of Netflix, Hulu, and what I spend at Amazon in a year, we are still looking at a yearly cost of around $579 ($15.98/month for Netflix, $7.99/month for Hulu and 3 series at $25 for Amazon plus 6 movie rentals at $4). If I were still on cable, I would still be paying for Netflix, but lets assume this price raise pissed me off and I left, I’m still most likely going to head to Redbox on occasion. Those costs per year are somewhere around $740/year ($60/month for cable conservatively and $20 on DVDs).

So am I OK with Netflix, at almost $170/year of savings, you bet. Not to mention I low balled the cable cost, at it’s height I was spending about $75/month. Am I happy that Netflix raised their costs? No, of course not. Do I understand the need to raise revenues to generate and garnish more programming for a service I heavily use? Definitely. I’m not blindly following, the pennies add up for me, but if 2012 hits and I don’t start seeing new content, and worthwhile content at that, then I may walk. If Netflix follows big cable and starts raising rates at will without added value, again I may walk. But this is the first major price hike Netflix has done in 12 years of service so I just don’t see the need to chase the monster down with my pitchfork yet, I’ll keep it in the garage for a little bit.