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July 15, 2011 in Features
Netflix raises cost of DVD subscriptions
NEW YORK — Why is Netflix raising its prices? In part, because the company miscalculated how many people still want to receive DVDs by mail each month, a more expensive service to provide compared with its streamed Internet videos.
Netflix has been trying to lure subscribers away from its DVDs by offering cheaper plans that include movies and TV episodes delivered over its Internet streaming service. In November, it began offering a streaming-only plan for $8, its cheapest option at the time. Yet Netflix customers aren’t flocking to Internet video as quickly as some analysts said the company expected.
Many consumers are unwilling to give up the signature red envelopes. DVDs feature newer titles and the latest theatrical releases that aren’t available through the company’s streaming service.
So the company is adjusting its pricing to reflect the cost of its DVD business and to help bring in more money to cover growing expenses for streaming content.
Under the new plan, customers who want to rent DVDs by mail and watch video on the Internet will need to pay at least $16 per month. Netflix had been bundling both options in a single package for as low as $10 per month. But that bundled plan “neither makes great financial sense nor satisfies people who just want DVDs,” wrote Jessie Becker, Netflix Inc.’s vice president of marketing, on a company blog Tuesday.
The price hike serves multiple purposes, analysts say. It will likely push more people into the streaming service, which will help Netflix to lower its postal expenses. The cost of shipping a DVD can be as much as 75 cents per disc, while analyst Mike Olson of Piper Jaffray estimates that it costs just 5 cents to 10 cents to deliver a movie over the Internet.
At the same time, Netflix needs additional revenue to build up its streaming service. In the first three months of this year, Netflix spent $192 million on streaming rights after putting $406 million into the library last year. Licensing costs are expected to jump to $1.3 billion to $1.4 billion next year, said Arash Amel, research director for digital media at IHS Screen Digest.
“Netflix is under enormous pressures from the content owners to write bigger and bigger checks,” Amel said. “It had to find the money from somewhere.”
Netflix had 23.6 million subscribers in the U.S. and Canada at the end of March, double the amount from the same period two years ago. Its stock has more than doubled in value over the past year, compared with a 21 percent gain for the Standard & Poor’s 500 index.
Movie studios and television networks want to capitalize on Netflix’s success by getting the company to pay more for content.
In an example of the growing tension, Sony movies were pulled from the Netflix online streaming service last month because of what Netflix described as a “temporary contract issue” between Sony Corp. and its pay TV distributor, Starz. The issue remains unresolved.
Netflix’s contract to receive content from Starz ends next year, and analysts say Netflix will likely pay a significant amount to renew it. Netflix CEO Reed Hastings said it “wouldn’t be shocking” if Netflix paid more than $200 million per year for Starz’ service, far more than the estimated $30 million a year it is paying currently.
Netflix also wants to bring in more money because, as the company has grown, it is making less per subscriber. It got a monthly average of $11.97 per subscriber in the first quarter of this year. At the end of 2006, before Internet streaming was launched, the average amount paid per subscriber was $15.87 per month.
Still, the increased pricing has alienated Netflix’s customers, who have taken to Facebook and Twitter to complain about the company’s move. Amel, of IHS Screen Digest, said Netflix had tarnished its brand image by surprising customers with the pricing change. But he said consumers should expect Netflix to push them toward Internet streaming going forward.
“Netflix’s future is in the business of premium pay television delivered over the Internet,” he said.
© Copyright 2011 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
Horoscope 
Teseract on July 15 at 8:43 p.m.
The movie studios want more money, and as the saying goes, %@$% rolls downhill and the consumer ends up paying more money. In the meantime the movie industry complains about piracy.
Piracy wouldn’t exist or would be a very minor issue if the prices were in line with what consumers were willing to pay for the content. Piracy is a symptom of the disease of the movie studios failure to meet the price point that a consumer is willing to pay.
Streaming would be a better option if the picture quality wasn’t mediocre and if the sound wasn’t so poor. Those of us paying for both streaming and disc delivery were doing so because we wanted the convenience of streaming for mobile services (I can watch Netflix on my phone, for example) and the quality that Bluray discs provide when we’re sitting in front of our HD television sets. We’re now facing what amounts to a 60% rate hike. This isn’t the first rate hike either, prices have gone up several times in the past, most notably the cost of being able to rent Bluray movies.
I personally will be canceling my Netflix subscription at the end of my current pre-paid month of service. For streaming there are other options. Amazon Prime is quite appealing considering you get the streaming that Netflix offers with free 2 day shipping for items purchased from Amazon for a total of about $80 a year. This is much more cost effective than Netflix at this point ($96/year just for streaming) and you get free 2 day shipping on any blurays you purchase at Amazon’s mostly excellent prices, or cheap overnight shipping. It can pay for itself if you buy one item, especially if it’s heavy.
If Netflix doesn’t watch it, they’ll price themselves out of the market they helped create.