Friday, July 15, 2011

NetFlix Announces New Pricing Strategies

Netflix made news this week for announcing new pricing strategies aimed at incenting (not incentivizing- which is not a word) customers who don't use DVDs to migrate to the firm's streaming service.

It's a bold move, but may mitigate the ongoing criticisms of the firm's financials by CNBC analyst Herb Greenberg. He's complained about the way Netflix accounts for the costs of their content deals. This new pricing approach may moot those complaints.

I received an email a few days ago informing me that my combined 2 DVDs/month + free streaming plan was discontinued, effective September. Instead, my formerly $15/month service would be replaced by two separate plans, the total price for which is $20/month.

Various business media have reported a customer uproar over this move. I confess to not being entirely sure why. Well, I mean, yes, I understand no customer writes to a service provider to say thanks for a price increase.

But, that said, it's not a big deal. In my case, I simply went online this morning and cut my DVD plan to 1/month, returning my monthly fee to what it was before, give or take a few pennies. Fact is, I want the ability to order DVDs, but rarely use them. The first two discs for the HBO series Rome have lain on my living room floor for about four months now, unwatched. But as some pundits have noted, the Netflix instant streaming library of movies is still pretty spare.

However, for the under-30 set, who watch a lot of television series seasons via Netflix streaming, this plan will allow the firm to better-control its physical distribution costs while separating streaming and teaching customers to pay for it, rather than expect it as a free luxury with the DVD service.

As an equity portfolio investment, Netflix's move will probably draw fire from analysts and lose some value initially as a result of the pricing moves. In my own portfolios, it shows a not-too surprising $10 drop by mid-Thursday (when I am writing this) on a roughly $300 stock price at the day's open. Never the less, the issue is up 25% since early May- not too shabby, with the S&P negative by almost 2% over the same period.

Yesterday's Wall Street Journal carried a piece arguing that Netflix's new pricing structures, which will push more users to streaming, will eventually create so much more bandwidth demand as to push internet access providers to price said access into basic and higher-usage components.

As I wrote in a post several months ago regarding my equity portfolios' recent holdings, most are pretty robust and less-vulnerable to recent economic shocks. I believe Netflix continues to be.

After all, what might look like a 25% increase in service price to me was still only $5/month. Less than $100/year. And my reaction was what Netflix probably wanted- the same revenue at lower costs to serve.

Meanwhile, most younger users are now paying $8/month for streaming-only, which is minimal and, I think, less than the prior lowest-cost plan.

One of the aspects of Netflix's business which I admire is how inexpensive it is for what it offers. In an era of $10 movie tickets as the local dump of an art house theatre, $55/month cable television bills for a basic bundle, having online streaming of Netflix offerings to any device is a bargain.

A few bucks a month, more or less, won't change that anytime soon.

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