Why Netflix changed its pricing plans

83 Comments

Netflix updated its pricing Tuesday, removing the ability to combine DVD-by-mail and streaming plans and effectively forcing subscribers to choose one or the other. For those that wish to continue using both services, the change effectively raises the price of a combined plan by 60 percent, which has already caused some subscriber unrest on the blog post announcing the change and around the Internet. But why did Netflix make the change?

Ultimately it comes down to money, as Netflix VP of Marketing Jessie Becker acknowledged in the company’s blog post. “Given the long life we think DVDs by mail will have, treating DVDs as a $2 add on to our unlimited streaming plan neither makes great financial sense nor satisfies people who just want DVDs,” she wrote.

The cost of its DVD-by-mail operations isn’t supported by the $2 per month in additional revenues that Netflix gets from the previous add-on plan. While much of the infrastructure investment is a sunk cost and has been amortized over the years, supporting ongoing DVD operations isn’t a winning strategy for a company that is betting big on streaming. The cost of postage alone argues against such a heavy discount for a continued DVD-by-mail plus streaming offering.

But there’s another reason why Netflix is making this change: By forcing subscribers to choose, it’s likely betting that most will go streaming-only, thereby lowering the infrastructure costs of supporting them. As we wrote last year, the real cost of its streaming service isn’t defined by video storage, delivery or other infrastructure, but in the acquisition costs that come with it. That gives Netflix the ability to better manage its costs as it decides which content to invest in.

From an investor standpoint, splitting up Netflix’s operations more clearly into streaming and DVD-by-mail services could also give further transparency into its business. Doing so would enable it to break out operational costs from its DVD and streaming units, something that it has been unable (or at least unwilling) to do so thus far. With a management and organizational structure that clearly defines operations into separate units — streaming, DVD and international — financial analysts and investors will get a better idea of what’s driving revenues and costs. This could happen as soon as the fourth quarter of this year, once subscribers have been moved into one plan or another.

And finally, while Netflix weens subscribers off the combined plan and onto either a DVD- or streaming-only plan, there’s a side benefit to breaking up its plans and effectively raising rates for those who subscribe to both: In the short term, at least, we’re likely to see those who subscribe to both plans effectively subsidizing content acquisition costs for its streaming-only plan — except they’ll be doing so at a higher rate ($7.99 versus $2 a month) and with more transparency.

If Netflix does break out financial operations in the coming quarters, as we suspect it will, we could see whatever profits might come from a combined plan or DVD-only being shuffled to support content acquisition, as Netflix invests ahead to support more aggressive subscriber growth, both in the U.S. and internationally.

83 Comments

Gin

I request DVDs of movies not available for streaming. I would only continue to use Netflix for streaming if they offered the movies I want that are currently only available on DVD. There already exists DVD-only services such as Redbox and Blockbuster (remember them?).

geoffz

First the radical, ridiculous, confusing and inferior redesign of the UI and now double the price for services…i’m outta here!

Harrietinthecity

The selection of movies available for streaming is poor. After a while, watching stale movies gets old. Especially when the system inexplicably goes down in the middle of a session. Worse, Amazon just offered free streaming of similar movies for people with Prime memberships. So I’m not paying an extra $6 a month for DVD’s I rarely use.

Netflix may have outfoxed itself. I may just drop my membership totally since there are too many other options to get videos including the library and Redbox.

It’s ironic. I was tutoring students and had them do a math problem on what is the break even point and the advantage of renting a Redbox movie versus paying a monthly Netflix fee. We set the Netflix price at $9.99. Now it’s a no brainer. There’s no real advantage of choosing DVD’s but what’s left isn’t a viable options. There isn’t enough current material on Netflix to make it worth streaming.

Example: The constantly disappearing episodes of Spartacus and the loss of Dexter as a streaming option.

Nice customer service Netflix. Don’t be surprised when we all choose the “none of the above” option.

randy

For the first time, Netflix’s future looks pretty bleak! Ouch.

NETFLIX’s ONLINE BUSINESS:

Netflix suffers from a mediocre streaming library, and increasing competition. Meanwhile, major movie studios continue their stubborn refusal to participate.

NETFLIX’s DVD and BLU-RAY BUSINESS:

Two red-hot competitors, Redbox and Blockbuster Express, now offering cheaper DVDs and Blu Ray that consumers can access without waiting for the-day-after-tomorrow’s U.S. Mail.

ifyounetflix

I only have streamlined a few times because the selection sucks. I also maybe watch one or two movies a month thru mail with netfux. They raised the price a dollar a while back, no big deal. But now they are raising it 70%. 15 dollars a month for what I was paying 8.99 a month for a year ago? You must be crazy. I’m done. I can buy a dvd a month for that price and increase my collection and watch them anytime I feel like it. Just b/c you took out blockbuster doesnt mean you can start screwing us too. See you later. Redbox will get me thru it in the meantime.

Jack C

For me, Netflix streaming is overwhelmingly a convenience, but this recent shift on Netflix’s part makes me glad I just copied over an immense amount of my DVD collection to my home NAS. The annual cost of a streaming plan will virtually cover the cost of the HTPC I was planning to get. If I really want something, there are many options for buying digital content now, plus there is always Redbox in a pinch too. The last pricing change that Netflix implemented caused me to cut back, lowering my bill with them. This change will mean Netflix gets even less of my money. All of that said, this makes sense for them.

Erik Schwartz

What will be interesting to watch is the change in leverage Netflix has as they bey fewer and fewer DVDs. Right now Netflix has enormous leverage in their streaming negotiations because they’re negotiating with the same people who own the DVD rights and Netflix is the largest purchaser of DVDs in the world (by far).

If streaming grows, Netflix will have to buy fewer DVDs, this will negatively effect their ability to purchase streaming rights at a decent price.

That, combined with the reliance on CDN contracts, make me more than a little worried about the valuation on the stock.

Annie

I feel stuck on my decision. Some months I use streaming often while in other months I use DVD a lot. I cannot justify paying for both plans when my use of each feature kinda averages out to one. It would be interesting to track what this does to Redbox sales. Personally, I am leaning toward using them for all DVD rentals.

Joel

This is exactly what Ballbuster, I mean Blockbuster, did when they started their downward spiral. The customer is getting lost in the company’s inability to handle logistics. Set a price because it’s profitable and stick with it.

Jon Burks

Looks like I am just going to have to cancel and live with the media I have access to. I can’t justify this expense. They have essentially doubled the cost of what I am signed up for now. My pay hasn’t doubled. They are eroding the value. I signed up because I saw a value in what I was getting for the money I was paying. They are charging more and offering nothing in return.

Jesse

i will be going to dvds by blockbuster now for sure.. they have a much much better selection and get new movies right away unlike netflix.. for the money blockbuster is by far a better dvd by mail option.. we have both but not sure i will even keep the streaming only either but that wold be the only option we would consider at this point.. netflix dvd by mail selection is just not that great… not to mention at blockbuster our acount we can trade one at a time at a store for free(not that there is a store even remotly close..lol)

Dave Zatz

The why is an interesting topic. But it’s also fascinating to discuss how poorly this was communicated and justified by Netflix. This comment sums does a nice job summarizing:

http://www.zatznotfunny.com/2011-07/netflix-raises-rates/#comment-112352

I think the main thing that makes this increase hard to swallow is there’s no attempt to show us where the added value is as the consumer. […] Netflix hasn’t attempted to show us any value for us paying around 60% more (in many cases).

Juniper

I would gladly do streaming only, but over 70% of the movies in my queue are dvd only. Or.. you know.. torrents. Raising the prices by this much??? I don’t want to do dvd only, I don’t want to stream only. IF I have to make a choice, I’m moving from netflix period. I’ve been there since 2000. 11 years of loyalty and I get raped.

Justin Henry

It might be time to check out blockbuster. I agree with William. I pay for 2 DVDs at a time. The streaming was a bonus they added later.

Eric Olson

So Netflix is “encouraging” customers to opt out of the DVD plan in favor of the streaming plan… all in an effort to create greater cash flow on the streaming side to obtain the rights to more streaming content?

Sounds great. But I promise you, we’ll soon see another post on Netflix blog announcing a further membership increase to “continue bringing you the greatest entertainment possible”.

Nick

I’ve subscribed to Netflix for several years. Simply put their streaming service is for when I get bored (or my kids want to watch a stream of Bob the builder). For me, the content there is terrible compared to the content on the DVDs.

That being said, I am not married to DVDs and would care less if they forced me to make this choice if the content was universal. Unfortunately it isn’t and I refuse to pay both fees. Therefore, I (and I’m sure thousands+ of others) will choose to go back to OnDemand from the cable company and watch fewer movies.

Its a net loss for the studios _and_ Netflix.

Sudhir

Netflix has a very thin roster of movies available for streaming. For example, Robert Altman’s best movies are not available for streaming!

Timothy G Beckner

I also have to disagree with your conclusion – the streaming option has degraded over the last year and since I only use two DVDs per month, I will drop Netflix and look at Hulu for streaming. They needed an option between the 4.99 2-DVD and 2 hour streaming limited devices and the unlimited option. Which would be something like 7.99 2-DVD and 10 hour streaming to any device. Without that option, I am gone and I have been with Netflix since the 1998 or 1999. Too bad. The reason I am dropping the DVD option, is because I have DirecTV. I do understand why they had to raise their rate, but they needed to understand their customer usage patterns and offer plans that match, but to just increase their current under used plan by 60% could end up being a serious problem for them.

William Beem

You lost me with the $2 cost for DVDs. I subscribed with Netflix for a DVD service, and then they later added online streaming. Let’s face it, the titles available for streaming are not keeping pace with new DVD titles. Most of the streaming titles are old and uninteresting, but there are a few gems. Until the content online catches up and improves, DVDs have better value.

Jaimee

That is exactly what I thought, it seems to me they just pulled a bait and switch. I subscribed to a DVD service, and when they added streaming it was offered as a FREE perk in addition to the DVD service. Now they are trying to say I was subscribed to a streaming service and paid only $2.00 extra for DVD’s? Nice try Netflix.

A S

+1 It was very disingenous of them to switch around the costs of streaming and DVD like that.

Jason

Yup. But I’m not going to pay for both. I’ll just go back to red box for physical rentals. I had a blu ray plan that I almost never used too. I was basically giving them an extra $4 a month that they’ve now lost.

A S

Excellent example of why their streaming sucks right now and doesn’t justify this cost.

Calvin

Thanks NFLX. I will be cancelling the streaming service. Way to go.

Mike

When Netflix says “if you don’t like it you can always quit” they should expect their customers to take them up on it. Way to go.

DB Cooper

The lousy selection is the studios’ doing, not Netflix. NFLX isn’t having much luck in negotiating expanded rights to replace the sweetheart deals they inked a few years ago.

They know the future is in streaming – this move shows they want to speed it along, by weeding out unprofitable DVD customers.

Tracy Hall

Actually, I’m quite aware of the licensing issues – however, this move does nothing to solve those issues.

If they need higher revenues to fund more titles on streaming, then charge more for it and deliver a better product. *Over*-promising and *under*-delivering doesn’t seem like a consumer-satisfaction plan.

If the higher price would get me all the titles, then I’d pay it. Drop of a Hat. But this supposedly “tiered” plan ain’t it.

And bluntly, how does this plan weed DVD customers out? They’re still there. They still get titles. Heck, they get more titles. All it does is charge more to add the streaming option, which may well not have the titles they want; or charge more to add the DVD option, to get the missing titles.

All the pressure is to get more people to subscribe to *both*. Which is the opposite of your, and the article’s, contention.

Glen

@Tracy Hall – To get more things in to the streaming category, they have to license it with the studios. By upping the price for people who want to keep both, they can begin to cover that cost.

Scott

Tracy, They’d offer you every single title under the sun if they could. That is absolutely what they’d like to do. Your reference to their poor online selection has nothing to do with Netflix and everything to do with legacy Media companies desperately clinging to DVD sales. They have no interest in offering up their best content via the internet because they want you to plunk down $29.99 for Blu-ray DVD.

Jason

It doesn’t really matter why their online selection is poor. It only matters that it is. I don’t care what the reason is, there is very little justification for me to switch to a streaming only service at this time.

Blanca

Does this mean there will be a better instant streaming selection… Because it kinda sucks right now….

Tracy Hall

I have to disagree with your conclusion – my experience with Netflix streaming is they do NOT want to drive customers to streaming, but to “Both” – witness the really fairly poor selection of titles that are available on streaming.

With the exception of the obvious current TV shows, and recent “popular” movies, a striking number of titles are still “Disc Only” – in my experience, better than 80% of titles I search for are still “Disc Only”

If their goal were to drive to “streaming only”, they would make the titles available. It feels more like they wish to create a “dual” frustration – frustrated that a title isn’t available immediately (hence disc), combined with the frustration of waiting when it *could* have been on streaming – hence each driving to the other.

Arie Rich

I’d have to agree with you. As a current Netflix member and an advocate for their service (until now), I am highly disappointed that they would even try to charge $7.99 for streaming when their selection is very poor. I am seriously thinking on sticking with the DVD only option. Their streaming is not worth $7.99.

steve

“I am highly disappointed that they would even try to charge $7.99 for streaming when their selection is very poor”

Poor catalog in comparison to who? I’ve heard this over and over and I fail to see what other service out there has a superior streaming catalog for the price. In terms of streaming catalog Netflix is still outdoing Hulu and Crackle by far for the same monthly price. Nobody has been bitching about Hulu costing $7.99 a month, yet they don’t even offer a DVD plan.

It was inevitable that Netflix would make a move to begin killing off it’s DVD side of business. I’ve cancelled cable and have taken up subscriptions to Hulu and Netflix while getting a higher bandwidth data plan. I’m streaming HD quality video on demand and still saving money over the model of cable Tv + Blockbuster.

I’m not happy the price is going up, but it’s still cheap as balls for what you’re getting.

jsrag

Netflix streaming has a poor catalog in comparison to what people want to watch. It doesn’t matter what is available compared with other sites, it matters what is available that I want to watch. Frankly they should charge $7.99 for the dvd service and the streaming should be a $2.99 add-on because that is all it is really worth. And the comparison to Hulu is ridiculous. I don’t have to pay a dime to watch at least the five latest episodes of many of my favorite shows, and there are many shows with much more that that available for free. I actually don’t know a single person who has been willing to shell out for Hulu Plus.

Secondly, I don’t personally care how much it costs for them to get the streaming rights. It is stupid to overcharge me for what is available now for the possibility that more might be available to me in the future maybe. When they can deliver the kind of streaming selection that is worth the price, then I will pay for it. If they really think that streaming is the future then they should buck up, convince investors to get the kind of money that it takes to get the rights, and offer a legitimate selection of quality material at a reasonable price. This change is really just as likely to push people back to doing DVD only.

Ult

“Poor catalog in comparison to who?”

Poor in comparison to any major torrent site. They’re idiots for driving paying customers away over what can easily be obtained for free.

David

I couldn’t agree more. I’ve been a Neflix customer for years and talk it up all the time but the streaming selection is still not worth streaming only. Most of my streaming is spent looking for something for the kids and after picking something they’ve never heard of and starting it, it gets turned off after about 15 minutes!

Michael McKinney

This would be fine if the streaming was as updated as to the newest movies that are on DVD. 60% higher in costs? What are they thinking in this about broke USA economy. In another few months the USA will not even be able to pay its debts for the first time in history and are dollar will be worthless. Ween? what a word to use Ween! Ween this Netflix you price hikes are a joke splitting DVD and Streaming. I sure hope with this split they add all the newer DVD’s that are available to the Streaming or this will just turn into a market nightmare. Now that they split there will be a newer company on the rise that will have the combined mailing and streaming. Once your subscribers WEEN over to a newer combined plan they wont be coming back! The market strategist that come up with stuff are reaching oranges on a tree with green fruit!

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