My Facebook feed exploded the other day with news that Netflix was changing its pricing scheme. For some customers, those who subscribe to unlimited streaming and DVD plans, the new price would be a 50% increase. I subscribe to Netflix. A few months ago I re-instated my account to take advantage of the streaming-only option after canceling my account due to my lack of DVD receiving and watching. I will not be affected by the price change, but many of my friends will be.
The backlash, in terms of comments and threats, has been severe. Netflix released a press release stating that the reason for increasing the fee for certain customers was to better reflect the cost of doing business. Price changes are rarely about cost. More often they reflect market forces, like demand. Netflix has decided to increase the price because they have determined that they will profit more, despite the possible loss of customers that would come as a result as an increase that seems to be significant. With fewer legitimate competitors in the market, Netflix may feel they have some room to raise prices without fear of competition.
It still may be true that Netflix is experiencing an increase in cost. More customers are choosing the streaming option, now. Netflix needs to pay fees to distributors in order to receive streaming rights, and these are structured differently than DVD rental rights. These deals ensure production companies earn money to represent how a movie is viewed. Somewhere down the line, content creators, like writers, directors, and actors, receive royalties, and online viewing has only recently begun to be considered in that calculation.
Judging from an unscientific monitoring of feedback, many customers who currently have the unlimited streaming and DVD plan will switch to the unlimited streaming-only plan. Given the option of keeping their plan and paying more, reducing the plan and paying less, or canceling membership outright, that second choice seems to be popular. This may have been exactly what Netflix intended. While Netflix’s payments to distribution companies for streaming a movie or television show online might be higher than the payments for rights to rent out DVDs, sending, retrieving, and processing DVD rentals create overhead costs that make that type of service less profitable than streaming. This price change might be Netflix’s way to gently coax customers to switch away from DVD rentals towards streaming only.
If that is true, it is ironic that those most upset with Netflix’s pricing and public relations tactics are exhibiting the behavior most desired by the company. While customers may believe switching to a less expensive streaming-only plan will hurt Netflix, it may actually prove to be more profitable for the company.
Nevertheless, for those complaining about the company’s pricing tactics, it doesn’t hurt to remember a few things.
- Watching movies and television shows on demand or renting DVDs is a luxury, not a necessity or a right. If the service is unaffordable, stick to your budget and cancel the service. This isn’t like a increase in gasoline prices from $2.50 to $3.50 per gallon overnight. People need gasoline to work and earn an income. The backlash against Netflix seems to be more severe than that against any gasoline price increase in the past five years.
- Only canceling your account — and most other customers canceling their accounts — will send a message to Netflix. That’s unlikely to happen.
- The price for unlimited streaming and DVDs still seems like a pretty good deal when compared with other entertainment options, like seeing movies in a theater or subscribing to cable or satellite, particularly if you include premium channels.
Were you affected by the Netflix subscription rate change? If your costs would increase, will you be changing your plan?
Published or updated July 13, 2011.