Earlier today, Netflix published a post to its blog that said, in some of the thickest PR bullshit I’ve ever read, it was raising prices splitting its streaming video plan from its DVD plans, resulting in a 60% price hike for most of its customers:
First, we are launching new DVD only plans. These plans offer our lowest prices ever for unlimited DVDs – only $7.99 a month for our 1 DVD out at-a-time plan and $11.99 a month for our 2 DVDs out at-a-time plan. By offering our lowest prices ever, we hope to provide great value to our current and future DVDs by mail members. New members can sign up for these plans by going to DVD.netflix.com.
Second, we are separating unlimited DVDs by mail and unlimited streaming into separate plans to better reflect the costs of each and to give our members a choice: a streaming only plan, a DVD only plan or the option to subscribe to both. With this change, we will no longer offer a plan that includes both unlimited streaming and DVDs by mail.
You see: This is about “offering our lowest prices ever” and giving “our members a choice“. It’s win-win. Except that our plan (unlimited streaming and one DVD out at-a-time) which used to cost $9.99 a month will be $15.98 starting in September ($7.99 each for the streaming and DVD plans).
Why the huge price increase?
Last November when we launched our $7.99 unlimited streaming plan, DVDs by mail was treated as a $2 add on to our unlimited streaming plan. At the time, we didn’t anticipate offering DVD only plans. Since then we have realized that there is still a very large continuing demand for DVDs both from our existing members as well as non-members. 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. Creating an unlimited DVDs by mail plan (no streaming) at our lowest price ever, $7.99, does make sense and will ensure a long life for our DVDs by mail offering. Reflecting our confidence that DVDs by mail is a long-term business for us, we are also establishing a separate and distinct management team solely focused on DVDs by mail, led by Andy Rendich, our Chief Service and Operations Officer and an 11 year veteran of Netflix.
The reason why there’s still tons of demand for DVDs by mail is that, as good as Netflix streaming is compared to its competition, its selection is dwarfed by the number of titles in the company’s disc catalog. The best recent numbers I could find put streaming titles at about 20,000 and DVD titles at over 100,000.
Prior to the streaming-only plan offered late last year, you paid for the right to rent DVDs through the mail and members got internet streaming as a free add-on. It seems that pricing was more honest – DVDs are where you find the newest releases1 and a deep catalog of TV shows and classic movies. With its much smaller selection, streaming was a still a novelty.
However, it’s in Netflix’s best interests to get as many people onto its streaming plan as possible. From estimates I found online2, it costs Netflix about $1 to send a DVD to a customer when you factor in postage, handling, infrastructure, the cost of the disc itself, etc. On the other hand, it costs them 3 cents to stream a standard definition movie and 5 cents to stream it in HD.
As you can see, the profit margin on video streaming is clearly must higher than it was with the company’s old business model. One way to accelerate the trend toward streaming is to do exactly what Netflix announced today – jack up the price on the DVD plans so they’re unattractive to customers and hope they stay with the streaming-only plan. Then, continue to increase prices on the DVD plans every year until they’re so high, no one subscribes to them anymore and Netflix can happily close its warehouses and announce its service is available exclusively through streaming.
I have no doubt they want to get there as soon as possible, but in the mean time, it sucks to be a customer. We do watch most of our Netflix videos on our Roku box, but the streaming selection is still not that great. You need DVDs if you want to see new releases or if you want to work your way through HBO series’ like The Wire. The copyright holders don’t seem to be interested in making those things available on streaming, and it’s hard to say if they ever will.
The thing is, we don’t even get many DVDs through Netflix, so I don’t even care that much about the “Unlimited” aspect of the plan3. But to remove the option to get a few movies a month and then charge a lot more money for it – well, it sucks. Maybe they could grandfather us longtime subscribers on the two discs a month plan instead – I’d be satisfied.
Addendum: Peter Kafka over at All Things D had an article on Wednesday that backs up my theory on Netflix’s motivation for this price increase:
Reed Hastings’ company [Netflix] says it’s a cost issue. If people are going to use both his DVD-by-mail service and his Web video streaming service, he’ll need more money to support both businesses. That’s probably true.
Here’s what’s more true: Reed Hastings doesn’t want most of his customers to pay more. He wants them to pay less, and drop DVDs in favor of a streaming-only service.
To recap: Yesterday, Hastings kept the price of his streaming-only video service at $8 a month. But he raised the price of his companion DVD-by-mail service from $2 a month to $8 month, which will push many subscribers’ monthly fees from $10 a month to $16 a month.
Unless they stop using DVDs. Which seems to be what Netflix wants. Even though they haven’t said so out loud, to date.