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Why Netflix changed its pricing plans

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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 Responses to “Why Netflix changed its pricing plans”

  1. Come September I will ween my self from DVD and online versions. Until they make the online as good as the mail DVD I will look for another movie supplier. Until then Bye, Bye nteflix!

  2. Alfonzo

    This is not good news, just found it out, out of the blue thinking something wrong with my bluray player because the streaming menue was so short. Not good at all I will just start paying for streaming if they want to raise the price.

    • PAT_RIOT

      That is exactly what they want you to do. pay for a service that is not worth what they are charging. If everyone opts for streaming then they cut their costs dramatically while the customers see none of the kick backs. I say break the arm of the ones trying to strong arm us. drop them all together and use one of the many other emerging services.

  3. ContrerasMario37596080

    I paid $32.67 for a XBOX 360 and my mom got a 17 inch Toshiba laptop for $94.83 being delivered to our house tomorrow by FedEX. I will never again pay expensive retail prices at stores. I even sold a 46 inch HDTV to my boss for $650 and it only cost me $52.78 to get. Here is the website we using to get all this stuff, BidsOut. com

  4. Michael McKinney

    I called netflix and asked why the increase. They said because “It accurately describes their service and benefits their subscribers” Quote! LMFAO!

  5. I agree the selection they have for streaming is not good and not worth it. Netflix will have to add a lot more new releases to there instant play to get me an a instant play customer. I think they did this to soon the product should have been developed more before seperating.

  6. This would be just fine if netflix offered all their movies, tv shows etc in BOTH formats, but they don’t, so i do not think it’s fair to have to subscribe to both in order to get their stuff. They should have waited on this till they made their entire catalog available through streaming or dvd.

  7. The only problem is that the majority of flicks that are coming out are available in both formats!!! The Harry Potter series is DVD only and so no streaming! Gonna cancel service the day before it renews since they wont give back any unused time!!!!! Goodbye netflix you were good while u lasted!!!!

  8. The streaming content for children is excellent on Netflix and well worth $7.99 for anyone with kids. I cancelled DVD by mail & will rely on Redbox in the rare moments I have time to see a new release.

  9. Streaming is good but they don’t put enough newer movies on it. I rather have it streamed then mailed to see what i want that’s why cable will still rule until netflix or another company does this.

  10. russell

    as a light user of both dvd and streaming content, netflix has been making lots of profit off me for a long time because the monthly fee was too small too care about ($20/mo unlimited everything). now at $30/mo it is too much of a rip off to ignore. surely the studios are charging licensing fees per use – i’d gladly pay $2/use each streaming title and $3/use for each dvd title. why no per-use options? guess i will need to find a dvd per use option yo replace netflix. or get familiar with bit-torrent… ;)

  11. Not a big fan of the price increase as most people aren’t. I use the streaming service more than the by mail service, but it was nice having both options at a nice price.

    This might gain them more money, but will end up losing some customers to Redbox or some other option.

    I’m most likely going to stick with the streaming for a little while longer and see if the titles improve with this change.

    I can live without netflix as I already have tv service I’m not using but paying for.

  12. Mark Lai

    This separation should really show clearly how much value people place on the streaming service versus the DVD service. For me, the streaming has very little value, but the DVD service is very valuable because of their awesome selection. (No, Blockbuster or Redbox simply don’t have Netflix’s extensive DVD library right now). I guess I’m in a minority, but since people like me will continue to stick with Netflix, we should become more valuable to them as customers.

  13. As Louis CK said: “Everything’s amazing & nobody’s happy.”

    They raised prices by the cost of a Big Mac meal. You do still realize there are thousands of movies & TV shows you can stream to your TV? And the mailman will bring you your movies, right? You do remember having to drop $4 or more per rental at Blockbuster stores just a few years back, right?

    • PAT-RIOT

      your point is irrelivant. The article stated that they are trying to ween people off of the dvd paln and gear them toward streaming content. If this is the case then they MUST offer mor streamable content. FACT!!!!

  14. I think I’m done with them as of September. I’ll just use Red Box for new releases that I don’t purchase and Hulu/ Hulu plus for my streaming needs. I was planning on cutting either Netflix or Hulu plus and they made the decision for me. I use the streaming mostly for tv shows and Hulu Plus is just as good, if not better in that area.

  15. This has sealed my fate with Netflix. I will be an ex user. If they had everything steaming they do for DVD this would be a moot point but charging me 50+% more so I can get the stuff I really want on DVD is crazy. They just do not have the selection streaming wise to pull this off. You are about to witness a backlash and tons of cancellations. My dad is also cancelling his account for the same reasons.

  16. I never understood why people are paying for movies online anyway. I’ve never paid for a movie online in my life. I’ve always used thepiratebay and stagevu(dot)com as well as various other free movie streaming websites. Are you guys just too dumb to find these websites or too afraid?

    • PAT-RIOT

      not dumb or affraid..just have a little respect. I could easily run your credit into the ground but I try to respect people. perhapse you should try it sometime.

  17. Dan Smart

    They are in a highly competitive, rapidly growing industry. The weird part about this is that nobody else really does what they do, and they’ve given up that position. Unlimited streaming plus physical media was their unique selling proposition. Now, by forcing everyone into either streaming or physical media, the value of remaining a loyal Netflix customer is far less obvious. Their lack of a bundle price is baffling.

  18. Bob Forsberg

    I use BluRay disc rental & streaming services from Netflix. The streaming service has no new releases, only TV reruns and older movies. Even with a 22Mbps down from my cable provider, Netflix HD streaming chokes during prime time and reverts to less than DVD streaming quality. Too many problems for Netflix to be charging 1st class rates for a still buggy operation.

    Also, anyone else notice how much longer it takes for your DVDs to go out?

  19. This was just the extra shove I needed to cancel my Netflix subscription altogether.

    Only 1/3 of the movies in my queue were available for streaming. They were making plenty of money from me on one-at-a-time DVDs that sat with me for months, and a streaming subscription that rarely got used. Now I will save $120 a year.

    I hope a lot of their customers quit altogether after this lousy decision.

  20. Netflix doesn’t have to break apart streaming and dvd services in order to get a idea of what consumers prefer. It’s not as if they don’t already have information on how their consumers are consuming their products (whether it be by mail order dvds or streaming). My guess is Netflix after probably doing extensive research, realized that they can squeeze more money out of their users. Some may defect but most probably wont and will end up paying the full $16 to stream and order dvds since the content offered varies too much.

  21. Netflix streaming service actually sucks quality wise, and they don’t have the content. By charging more for their service more people will look at alternatives, which are emerging almost daily

  22. Cheryl

    Netflix has just lost a customer. I was shocked when I received the email today. How can they justify a 60% increase? Have been trying to call the customer service line to voice my concerns, but can’t get anyone to answer. Perhaps others are also calling with their displeasure? Maybe Netflix will get the message!

  23. Wow, Netflix totally just shot themselves in the foot. I really wonder how they expected their customers to see this as something other than a blatant cash grab. Those at Redbox, Blockbuster and Hulu have to be smiling today!

  24. I think people are overreacting way too much….no offense but it’s 5 freaking dollars. Don’t go to Starbucks for one day!!! Holy shit everyone keeps expecting prices to stay the same…FYI McDonald’s has raised their prices over the past 5 years. With less whiny bitchy people….I can get the new movies faster

    • That is the car salesman’s argument – how much can u afford to pay per month. The question should be “what is it worth?” there is no value being added for the extra cost. And so I’ll cancel my service and look for cheaper options.