Yesterday Netflix announced changes to its subscription plans. Instead of offering a $9.99/month plan that covers unlimited DVD-by-mail rentals (one at a time) and unlimited Internet streaming, Netflix will now sell each service separately for $7.99/month. In other words, to get unlimited DVDs and streaming will now cost $15.98/month, 60% more than it did previously.
Netflix claims the move is designed to bolster the long-term prospects for its DVD business. The previous price system treated DVDs as a $2.00 add-on to the $7.99 streaming charge. The risk is that some customers might switch to the streaming-only plan and rely on other providers, such as Redbox or Blockbuster kiosks, for DVDs. But the real question is whether Netflix can expand its streaming library, which lags well behind its DVD catalogue. As Thom Forbes writes at MediaPost,
Netflix founder Reed Hastings decided some time ago that the future of his business was in streaming, most stories point out. Initially, the company was able to cut favorable streaming deals with several Hollywood studios but everyone expects negotiations in the future to be tougher. At the same time, perhaps because of the scarcity of recent blockbuster releases through streaming, the DVD business has evidently remained stronger than the company anticipated. So it has reassessed its position of offering the mail service for about a $2 per month “premium.”
The International Business Times adds that splitting the subscriptions may be a prelude to those “tougher” negotiations:
“In our view, the company is facing increasing pressure from content providers to base streaming content costs on the number of overall subscribers,” Wedbush Securities analyst Michael Pachter wrote in a note to clients.
By bifurcating its subscriber base into streaming and non-streaming plans, the company may be able to successfully argue that a lesser number of subscribers access streaming content, and may be able to control growth in streaming content costs.
“Our central thesis has been that the company’s streaming content costs are rising faster than its revenues; today’s move reinforces our conviction that this thesis is correct,” Pachter wrote.
The analyst had earlier estimated that Netflix’ streaming costs could rise to between $1.6 – 2.2 billion in 2012 and now believes that content costs are tracking closer to $2.2 – 2.5 billion, perhaps providing the catalyst for today’s action.
Netfix customers, of course, have taken to the virtual barricades to complain about the price increase for an unlimited DVD-and-streaming plan. The phrase “price gouging” has no doubt come up a few times. (Josh Zerkle throws some necessary cold water on that argument.) What’s interesting is that it won’t occur to most people to direct their anger at the Hollywood studios that are actually making it more difficult — thanks largely to the their dependence on the government’s copyright regime — to open up more content to online streaming. Once you get past the knee-jerk emotional reaction to the price increase — the notion that somehow Netflix is violating your “right” to a certain price level — you can start to see how prices reflect changing economic realities.
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Interesting. I really like streaming Netflix, but a common feature of using it is disappointment at what titles aren’t available. If they were smart, I suppose they’d make those titles available online via some sort of on-demand arrangement (like you get through Comcast or Amazon). It would probably make them more money than shipping out all the DVDs.
Licensing costs. Copyright makes this impossible to do legally.
The comments that I’ve seen do not indicate that people are angry because they think their “right” to cheap entertainment has been violated; they are angry because they feel betrayed.
Netflix had the reputation of being different than your standard corporation (whatever that means), and have been perceived as the David pitted against the Goliath of broadband providers — Verizon, AT&T, Comcast, Time-Warner Cable, who of course all are (or were) regulated monopolies.
But Netflix altered that perception, and threw away a great deal of goodwill, when they put out a standard piece of corporate BS chock-full of doublespeak and cliches about they were “improving” consumer choice etc., when in fact they were raising prices by 60% (or more) for most of their subscriber base (all the Netflix customers I know subscribe to both the streaming and DVD-by-mail services).
If Netflix had announced that the modified pricing structure was due to pressure from the movie/TV studios, this would have all played out differently — people would likely be boycotting cinemas and/or cancelling cable instead of cancelling Netflix.
Similarly, if Netflix had “grandfathered in” current subscribers — i.e. if the price change did not become effective until you altered your subscription(s) — there would likely not have been nearly the backlash. Even cellular providers, who ordinarily never miss an opportunity to gouge their customers, provide such grandfathering.
It’s also worth noting that Netflix has been aggressively expanding overseas — which leads one to suspect that the price increase may have as much or more to do with covering the costs of that expansion than with pressure from the studios.
Austrians and libertarians complain non-stop about the elitism and arrogance of central planners and their disregard for the common man. But I notice with dismay that when the common man expresses disapproval of a corporate entity, those same Austrians and libertarians speak of the common man with the same sort of snobbish disapproval I expect from the apparatchiks in our bloated federal government.
Your point about Netflix’s botched handling of this is well taken. Indeed, the Josh Zerkle post I linked to makes the same point.
However, I’m amused by the charge of “snobbish disapproval” of the “common man” in relation to a service that distributes movies, a classic luxury good. I don’t begrudge anyone who cancels their Netflix subscription — I myself am not a subscriber — but I don’t think one can equate Netflix with a government planner.
As soon as Netflix starts holding a gun to people’s heads in order to pay for their services, I’ll accept equivocation with governmental central planners.
Perhaps if the common man did not immediately shout “corporate greed” everytime his prices went up, and instead tried to find out WHY his prices went up, there would be a bit less disapproval of them. But when they shout and whine like babies I can’t help but feel a bit irritated towards them when they don’t even have a clue as to what they should be becoming annoyed about.
Seriously, the entire underlying problem is essentially one of government privilege giving these “rights holders” the ability to do this. Yet who is the one who has been largely singled out as the greedy party here? The one providing the useful service, naturally.
I just wish the Netflix PR guys had been honest and pointed the finger to hollywood for these price increases. That would have been a much better outcome.
It’s also not just the price increase. They recently made a major change to their website that broke/took away a lot of features that we all used. They explained that this is better for us. But we have to disagree. With a 60% price increase, it makes my options easy. I am dropping netflix.
-They just raised their prices 9 months or so ago
-They broke their website
-They are raising their pricing again by 60%
My problem isn’t really “I should have this because I want it,” it’s more “I should have either an increase or a realistic chance on increase in the value of the service that corresponds with the increase in cost.” If they had come out and said “we’re increasing the cost, but look! we have all sorts of new content coming,” I don’t think anyone would care. The problem is that the promise of streaming is consistently not realized, and the library is shrinking, not growing (they lost Sony recently, which they claim is temporary, but I suppose that’s up to Sony).
Price gouging? The same stuff we currently watch for $10/mo on Netflix would cost us $50/mo on cable. Who is gouging?
I’m not sure exactly how same the products are. I can’t get most weekly episodic stuff on Netflix. On cable, I’m hard pressed to find cult films or decent documentaries. I think the stuff is different.
Yah, the streamed stuff is not in HD, either, but honestly, having grown up with the snowy UHF stations on the set-top rabbit ears, I never notice…
Or they could be found for $0 per month on rapidshare, torrent sites, etc. The studios should be thankful that people are paying for their products at all, since most all of it is available for free for those willing to seek it. They’re just going to push people away from a paid service (Netflix) into some of the freer less than legal options. It’s a bad move on their part.
I dropped the DVD portion of my plan, since I wasn’t using it anyway.
So if the idea is to shift to a streaming-only business model, it works for me.
The market has already determined that the price to watch these films in your home is $0. What you pay Netflix for is, essentially, convenience. Convenience from searching torrent sites, searching downloads, being weary of viruses, spyware, and spam, etc.
I pay for online content I can get for free.
My time is worth more then the time it takes to search for downloadable content. If I can have virtually unlimited access to stuff for 10 bucks a month then that makes me happy.
I’m one of those on the $9.99 plan who will switch to streaming only and use Redbox for rentals, since I can drive half a mile to get a movie anytime instead of waiting 2-3 days. Guess I’m too impulsive when it comes to what I want to watch. I’ve had the same dvd sitting on my counter for about 4 months now, that’s how little I use the dvd mail service these days. And the streaming selection is rather sad, at least for movies. I mostly watch it for the various documentaries and nature shows. National Geographic seems to let them stream most any of their shows. I haven’t even had cable in about a year since Netflix and other internet sources can provide what I want to see for 1/10 the price.
So the streaming is still worth it, though I wish they’d offer a premium service that contains more recent movies. I’d pay another $10-15/month or maybe more if it meant a better selection of newer movies. And I certainly understand that it is the IP regime that makes it hard for Netflix to carry a good selection with its streaming service.
With Netflix’s price increase, Blockbuster’s exorbitant streaming costs, and the major studio’s reluctance to release streaming rights to either entity, it is no wonder that P2P is growing so quickly. The RIAA’s and MPAA’s recent efforts to curtail that streaming are interesting, especially considering that Comcast/Universal/NBC owns a huge chunk of the material that would be streamed. You would think that the studios, especially a content pipe like Comcast, would want alternative means to recapture some of that “lost” revenue through streaming deals.
This is based on the assumption that what these people want is money. There seems to be many ways for the current content providers to offer their products profitably using the internet, but simply refuse to or severely restrict the access to such content. The only rationale I can think of that explains this is the desire to control.
They are buggy whip manufacturers looking for a market for buggy whips.
They ‘content industry’ provided important services to consumers because they were able to establish distribution networks for their material. Stores, theaters, middle men, shipping companies, standardize hardware and media for playback, promotional campaigns and so on and so forth. It was not just paying actors to act and directories to direct; it was a entire industry designed to provide access to content.
Now we have the internet and it’s removed 90% of the reason they exist. Pretty soon the only illegitimate function they will provide is promotion of artists works. They will no longer be dominate force and their industry is all but evaporated.
This is more so true for the music industry then the movie industry.
DRM and DMCA and anti-piracy is never about preventing ‘file sharing’. It’s just controlling distribution rights and distribution channels. The way DMCA works is that it essentially provides the ‘big content’ corporations the ability to dictate the design of software and hardware.
They want to setup distribution channels on the internet that artists are going to be forced to use to get to customers and customers are going to be forced to use to get to content. It’s not about controlling individual piracy, it’s about controlling other businesses and limiting who is allowed to participate in distribution of material and control who is allowed access to the market. Just so they can go on controlling the distribution channels like the in the bad old days.
Think about the ‘voluntary rating system’ for movies and how that controls access to movie theaters. It costs a lot of money and it takes a lot of influence to get your movie into a mainstream movie theater and your content promoted on television and radio.
On the internet ANYBODY can access the consumer. Netflix is a convenient thing, but there is nothing preventing anybody with a website from setting up their own streaming services and getting into people’s living rooms.
DRM/DMCA etc etc is not about piracy. It’s a attempt to control who has access to consumers.
Damn. This is a pretty huge blow to Netflix.
More companies are competing with Netflix (Amazon, Hulu, iTunes) and the price goes up? With competition, the price is supposed to go down. Whenever this happens you know you don’t have a free market. The culprit is copyright.
Wrong! Netflix built its business model on the end user’s unlimited access to broadband without owning the last mile. It was predictable that the providers will not like this. And they don’t. They are already copying and applying the system to their own advantage. Netflix was broke before this scheme and remains after this last ditch effort.
After all, there is no such thing as unlimited access!
You said it was predictable that the providers will not like this. Are the providers the ones holding the copyrights? If so, then retract what you said.
“Providers” are the internet providers. The customer service you also use to read this. They have nothing to do with copyrights.
So why is the price going up with increasing competition? Is it because of regulation of internet providers?
There seems to be something missing from your argument.
What, exactly, are ISPs doing that is causing Netflix to charge more for DVD service?
Again, the original business plan relied on unlimited internet access of the end users. The false assumption was that you and everybody else get unlimited access when you are promised to get unlimited access. Before netflix the mass users never approached their limit so for them it seemed unlimited. The marketing gimmick worked. However, after netflix, these channels just got saturated, reached their limits.
If you don’t believe me, just try to calculate the netflix demand in terms of bandwith. You can do it based on netflix’ data.
Since the providers never gave up the last mile they will rule the whole streaming movie renting industry. Now netflix is trying to stay afloat by raising fees. It will hardly work. Netflix will be just an episode after all settled.
What about competition between internet providers? If it’s a free market, then this will create opportunities for new providers to offer higher bandwith and lower prices.
Your theory still doesn’t hold any water. You completely failed to explain how ISPs are causing Netflix to raise prices. Waving your hands around saying that the ISP is causing prices to rise does not explain the mechanism or method on how this occurring.
In fact the article is stating that they are raising the prices on mailing DVDs and not streaming as if they are trying to encourage customers to choose streaming.
So it seems the complete opposite of what your talking about.
It’s not a free market. Cable and telephone service providers are thought of as ‘natural monopolies’ by our glorious leaders which decided that instead of letting the market work they would just force monopolies on us combined with significant subsidies for the chosen corporation.
If it was a open market then we would have far more bandwidth, with more choices, and cheaper.
@nate-m,
What you miss is that netflix is in direct conflict with ISP providers due to quality collapse. Raising prices is just the last straw to survive. Let me know if you need more explanation though I doubt I can do better than Denninger.
This is from Karl Denninger from last year:
“None of these providers – including the telcos with things like FIOS – are able to provide the internal plant (say much less long-haul routing) to cover the sort of use that comes with streaming video to a large percentage of their users.
$50 sounds like a lot of money. It’s not. If you want 100% coverage on your bandwidth be prepared to multiply that number by four or so in order to get it.
NFLX is selling something for $8 that in fact costs $100+ to provide when everyone in your neighborhood wants it. When everyone is paying $50 but only consuming $25 worth of bandwidth and you come along and use the “extra” $25 from five of your neighbors the model still works. But when all of you want to use it all suddenly the model becomes uneconomic for the ISP. If they leave the overcommit alone then your service all sucks and it doesn’t work for anyone during peak usage hours.
The only other options are to QoS the traffic so you get the “extra capacity”, which means service sucks for streaming video during peak hours (but it’s fine at 3:00 AM) or jack the price. If you manage to force no QoS restrictions via net neutrality legislation then the price will go up and you’ll either be faced with byte-count tiers of service or simply materially higher prices across the board – and that supposed $8 service will turn into a $50 one – whether you pay it to NFLX or the ISP.
COX’s downbound transport isn’t the problem nor is it for Verizon’s FIOS. It’s the local and area transport switching and bit transport that becomes a problem. It’s solvable through the application of money, but you want it without paying the money. That’s not going to work.
The company’s (NFLX) “success” is due to poaching, and that won’t last.”
Also read: http://seekingalpha.com/article/257260-netflix-can-its-business-model-survive
IP is not internet providers which are called ISPs… its intellectual property. Read the entire blog and you will see how there is blame placed on Hollywood and the government copyright laws which make it more difficult for Netflix to deliver us more streaming content.
Thanks Anthony. I still say it is the ISP-s not IP what kills netflix.
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