Netflix Streaming Plan Lowers Price But Boosts Margins

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Updated throughout. Netflix today officially announced the introduction of a streaming-only plan in the U.S., priced at $7.99 per month. The company is also raising the price of its unlimited DVD plans between $1 and $8 per plan (check out the table embedded below for all the pricing changes). But while Netflix could see its average revenue per user decline, as new and existing subscribers choose to go streaming-only as opposed to opting in to more expensive DVD-by-mail plans, its profit margins could actually improve with adoption of the streaming-only option.

From the Netflix blog:

“The price increase will allow us to continue to offer the popular plan choice of unlimited TV episodes and movies streaming instantly along with unlimited DVDs. The new plan, which does not include DVDs, is a great option for the increasing number of members who only want to watch instantly.”

Netflix first introduced a streaming-only plan in Canada in September, where the company currently doesn’t offer a DVD shipping option. CEO Reed Hastings said back then that Netflix was looking at bringing a similar plan to the U.S., and some site members have reported that they were offered such an option weeks ago.

The price increase on DVD-by-mail plans may turn off some of Netflix’s more traditional customers, but it definitely makes sense for the company. Netflix now delivers more programming via streaming than via DVD, and streaming is much cheaper for Netflix than shipping DVDs. If its existing DVD customers choose to “downgrade” their service to a streaming-only plan, its revenue per subscriber might fall, but its profit margins will actually increase.

In a research note by J.P. Morgan issued this morning, analyst Imran Khan estimated more than 30 percent of Netflix’s revenue is spent on “DVD fulfillment.” Not just that, but the effective cost from streaming is essentially fixed, due to licensing agreements the company has struck with various Hollywood studios and other content owners. As a result, each new streaming-only subscriber that Netflix brings on contributes more heavily to its profit margins. As Khan writes, Netflix is essentially “offering a lower price on the streaming plan in order to incentivize users to opt for the higher-margin product.” For Netflix, that comes as welcome news, particularly as it’s better able to manage the cost of bringing on new content than it is able to manage the cost of shipping DVDs, which keeps going up.

Image of Netflix envelope courtesy of Flickr user Scott Feldstein.

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