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My $1 Question for Netflix

13 Oct, 2008 By: Stephanie Prange

Netflix last week decided to raise subscription prices for those who rent Blu-ray Discs.

On the surface, that seems reasonable. Blu-ray Discs cost more to buy than DVDs. Why not charge customers who want to rent those higher-cost discs more?

But when you consider that Netflix offers movie streaming at absolutely no extra charge, it brings up some interesting questions.

Why is the ability to rent Blu-ray Discs worth $1 more a month, when streaming — which obviously costs Netflix something in terms of server space, programming and IT — isn’t worth a penny more?

It may indicate the value Netflix — and by extension its customers — place on the high-def disc versus lower-resolution streaming. Or it may indicate that Blu-ray has a stronger market than streaming — one for which customers are willing to pay.

Also, it may indicate that Netflix, while straddling the packaged media and digital delivery line, is determined to compete in the Internet-delivery arena — even if it means subsidizing it while charging more for renting the high-def discs.

Netflix executives have said Blu-ray Disc rentals represent a very small part of their business. Why then are they charging this very small group of customers more? Why are they subsidizing the streaming customers?

For the most part, the inexorable trend for rental prices has been down, helped along by the ever-shrinking cost of DVD. During an extended price war, Blockbuster Online’s rental service and Netflix pushed the price of viewing rental movies to new lows. In that particular battle, Blockbuster finally blinked.

And now Netflix, too, is looking to hold the line on pricing and even raise it (at least on Blu-ray) — except when it comes to digital delivery.

I have to ask, though, if Netflix sets a precedent of giving movie streams away for free, how will it ever be able to charge for that service?

How will Netflix make money in the non-disc future when it has so devalued the very service upon which it hopes to base its new business model?

It’s the quandary facing many Internet movie delivery services, and it will face Netflix in the years to come.

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