Behind the increase: Why Netflix is raising prices

Jul 14, 2011 By CHIP CUTTER , AP Business Writer
Behind the increase: Why Netflix is raising prices (AP)
FILE - In this photo provided by Netflix Inc., a representation of the Netflix one-click remote available on many consumer electronics devices is shown. Netflix has provoked the ire of some of its 23 million subscribers by raising its prices by as much as 60 percent Tuesday for those who want to rent DVDs by mail and watch video on the Internet. New subscribers will have to pay the new prices immediately. The changes take effect Sept. 1, 2011, for Netflix's current customers.(AP Photo/Neflix Inc.)

(AP) -- 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 to its streamed Internet videos.

Netflix has been trying to lure away from its DVDs by offering cheaper plans that include movies and TV episodes delivered over its Internet . 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 trademark 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, .'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 Jaffrey 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 risen 147 percent over the past year, compared to 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 should expect Netflix to push them toward Internet streaming going forward.

"Netflix's future is not in the DVDs," he said. "Netflix's future is in the business of premium pay television delivered over the Internet."

Explore further: Sony's PlayStation 'gradually coming back'

not rated yet
add to favorites email to friend print save as pdf

Related Stories

Netflix raises rates, irks subscribers

Jul 12, 2011

(AP) -- Netflix has provoked the ire of some of its 23 million subscribers by raising its prices by as much as 60 percent for those who want to rent DVDs by mail and watch video on the Internet.

Netflix to stream movies, shows in Latin America

Jul 05, 2011

(AP) -- Netflix is expanding its movie and TV show streaming service into 43 countries throughout Latin America in the online movie rental company's largest international expansion yet.

Amazon buys European movie rental service Lovefilm

Jan 20, 2011

(AP) -- Amazon.com Inc. is buying Lovefilm, a European movie rental service akin to Netflix Inc. The deal announced Thursday heralds Amazon's entrance into a market where Netflix doesn't yet do business, and it left analysts ...

Netflix video 'king' of US Internet traffic: study

May 17, 2011

Films and television shows streamed online by Netflix amount to nearly 30 percent of the content racing downstream on the US Internet during peak periods, according to a study released Tuesday.

Recommended for you

Sony's PlayStation 'gradually coming back'

3 hours ago

Sony was still struggling Saturday to fully restore its online PlayStation system, three days after the Christmas day hack that also hit Microsoft's Xbox, reporting that services were "gradually coming back."

Uber broke Indian financial rules: central bank chief

3 hours ago

India's central bank chief lashed out at Uber, already under fire over the alleged rape of a passenger, saying the US taxi-hailing firm violated the country's financial regulations by using an overseas payment ...

Taxi app Uber defies ban in Spain

Dec 26, 2014

Smartphone car-ride service Uber vowed Friday to keep operating in Spain despite a ban following a lawsuit by taxi drivers and said it would fight the case in court.

Sony film mess reflects gadgets-entertainment gap

Dec 26, 2014

Sony's iconic gadgetry and the star appeal of Hollywood may have appeared to be a perfect match when the electronics giant bought Columbia Pictures in 1989. A quarter century later, it's apparent that Sony ...

User comments : 2

Adjust slider to filter visible comments by rank

Display comments: newest first

Doug_Huffman
1 / 5 (1) Jul 15, 2011
Hmm. Verry interesting. It will be year's end before my satellite ISP upgrades to enable streaming Netflix. Maybe I'll not change my DVD only subscription. More so for despising television as a market and as a paradigm.
Shelgeyr
1 / 5 (1) Jul 15, 2011
To stay profitable? To boost margins? To charge what the market can bear? To strategically get out ahead of where they believe the market (and technology) is going?

Sounds reasonable to me, and good for them!

If it turns out they're wrong, they'll adust, and maybe we'll be reading "Behind the decrease: Why Netflix is lowering prices", as if it was a huge mystery.

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.