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Netflix Raises Price for Getting Streaming and Discs

12 Jul, 2011 By: Chris Tribbey

Netflix July 12 announced it would separate subscriber plans into DVD-only and streaming-only offerings, essentially raising the base price for getting both from $9.99 to $15.98.

The announcement comes a day after news of the online retailer’s new $7.99 DVD-only plan.

Beginning Sept. 1, current subscribers to Netflix’s $9.99 DVD-plus-streaming plan will have to choose between DVD-only or streaming-only plans, or pay $15.98 a month for both. The streaming-only plan already was priced at $7.99.

“Netflix members love watching instantly, but we’ve come to recognize there is still a very large continuing demand for DVDs by mail,” said Andy Rendich, Netflix chief service and operations officer. “By better reflecting the underlying costs and offering our lowest prices ever for unlimited DVD, we hope to provide a great value to our current and future DVD-by-mail members.”

Netflix also is offering an $11.99-a-month plan for DVD, which gives consumers two DVDs at a time. The $7.99 plan allows for one DVD at a time.

“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,” said Jessie Baker, VP of marketing for Netflix, in a blog post.

Netflix also is establishing a new management team focused solely on DVDs, with Rendich, an 11-year Netflix veteran, at the helm.

The news comes on the heels of Netflix CFO David Wells’ assertion in early June that the company was looking to pay more attention to its DVD roots.

“We’re looking down the road at both re-energizing DVD functions and paying a little bit more attention to it, or at least stop really de-emphasizing it as well right the economics of that business,” he said.

Netflix has been offering its streaming plan since 2007, and has watched membership balloon from 6 million to 23 million in the U.S. since.

“In order to prosper in streaming we must concentrate on having the best possible streaming service,” Hastings and Wells wrote in a note to investors then. “As a result, we are beginning to treat [streaming and DVD] separately in many ways.”

Consumer reaction to the price changes was overwhelmingly negative, with thousands going to Twitter to voice their concerns, and thousands more commenting on Netflix’s blog. A Facebook page decrying the decision sprung up within hours.

“The only way that this is terrific for the customer is if you plan to offer your entire collection available for streaming, otherwise this is just yet another way to choke more change out of your customers,” wrote Scotty Fagaly, of Olive Branch, Miss., on Netflix’s blog.

Netflix subscriber Hideki Saito of Issaquah, Wash., wrote: “I love Netflix, I really do. But this decision [gave] me no choice but to remove all DVDs from my queue to cancel that portion of service, and I’m now seriously considering canceling [the] streaming portion, too.”

Saito’s comment was posted on Netflix’s Facebook page, where nearly 10,000 had commented on the move by 5 p.m. PST July 12.

However, despite consumer outrage, Russ Crupnick, entertainment industry analyst for The NPD Group, said Netflix’s decision to offer a DVD-only option makes perfect sense, and proves there’s still life for physical disc.

“There is still a large population of physical renters who Netflix can [get] on board, and then later convert to streaming,” he said. “They can build some equity as a wall versus other over-the-top options and cable.

“Three of four Netflix streamers are also still regularly getting physical as well,” Crupnick added. “And until the licensing and catalog issues get worked out the DVD and Blu-ray option represents a strong alternative to other rental options that offer a broader selection of more current titles.”

Eric Wold, research director with Merriman Capital in San Francisco, said the price hike for Netflix to have both streaming and DVD may cause some to cancel, especially after the $1 price hike on its combo plan at the beginning of the year.

“While we understand Netflix’s move to more effectively monetize the costs of acquiring both DVD and streaming content, we would not be surprised if existing Netflix subscribers re-evaluate their monthly subscription to Netflix,” he wrote in a research note.

Wold said Redbox could “be a beneficiary of any churn,” suggesting Netflix customers could choose the $7.99 streaming-only plan, and turn to the kiosk operator for $1-a-night DVDs.

“Even though Redbox’s average rental period is about two nights, consumers have the ability to watch movies for $1 a night — indicating potential incremental value from Redbox to anyone requesting less than eight DVDs a month from Netflix,” he wrote.

Redbox president Mitch Lowe would not comment on Netflix’s change in plans, reiterating instead that Redbox’s national reach (27,000-plus locations) gives
“consumers access to the latest DVDs, Blu-ray Discs and video games for as low as a buck a night.”

Netflix’s decision to offer a $7.99 DVD-only plan does back up a Redbox-commissioned study on the staying power of physical disc. The study, released in April and published exclusively by Home Media Magazine, concluded that physical media will remain the dominant home media player through at least 2015.

“The portability and relatively inexpensive price point of the DVD help expand the lifespan of physical media, highlighted by Redbox’s $1-a-night rentals and Netflix’s unlimited DVD subscription plans that start at $9.99 per month,” that study read.

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