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Thoughts on Netflix’s Pricing Changes

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I imagine just about any and every new website you visited this week had a story about Netflex's pricing changes. For those who might have missed it, the company is scrapping it's $9.99 plan for one DVD at a time and unlimited streaming of content over the Internet and replacing it with two plans: $7.99 for the DVD rental and $7.99 for the unlimited streaming. Customers that were paying $9.99 before will pay $15.98 for the same service. I am one such customer.

An Emotional Reaction

When I read about the change I immediately sent my wife an email about it - something that I rarely do. Judging by the response on the news over the last few days, it seems like I wasn't the only one to react emotionally. I took a minute to think about it. The 6 dollars a month isn't going break our budget. In fact, it's probably not going to be particularly noticeable in our monthly expenses.

Something else must be rubbing me the wrong way. After analyzing it a bit, it's the nearly 60% raise in costs with zero new benefits. (Some may argue that the online streaming will have new options, but that's a little hard for the customer to quantify.) I think it's probably universal that people always rebel against those kind of sudden price hikes without being thrown a bone. If Netflix had nickeled-and-dimed a dollar or two over a few years, I think they would have avoided the outrage. If Netflix announced that with the price increase, they'd allow people to keep 2 DVDs out at a time. In that case, I'd say, "It's not good that they are putting a forced price increase out there, but at least I'm getting more value for the service." It's a little like the movies raising the price of their popcorn and then giving you another 8 ounces... you probably didn't need one and a half pounds of popcorn... and might not eat it... but it's comforting to get it. It would also be a win for the company because of the increased margins.

With this being the case, it seems that I have three options:

  1. Just pay the $16 a month - Hey, this is what cable companies did for years and years. I'm already used to it. On the other hand, I've been on the lookout for ways to reduce my cable bill, so it doesn't bode well for Netflix's future in our household
  2. Go to the one DVD at a time option at $7.99 - I'd have to check with the wife, because she occasionally streams movies, but I'm guessing that most months we don't stream more than one. That makes the $7.99 a high price to pay for the option. The movies available for streaming never seem to be the latest releases or the hits. They are probably ones we could have set our DVR to tape if we had the forethought.
  3. Drop Netflix all together - This will probably cost me more in hotel fees when my wife finds out. It's not a realistic financial option.

I'm thinking the right option is the 2nd one. It gives 80% of what we use Netflix for at a discount to what we are currently paying. However, before fully going down that road, it's worth asking the question, "Am I getting good value for my movie renting dollar with Netflix?" To answer that, I found this little Netflix calculator. You simply cut and paste your Netflix rental history into it as well as what your plan is, and spits out some interesting statistics. Here's what it has for me:

Your results:

You've rented 103 DVDs over 33 months from October 27, 2008 to July 06, 2011.
Your plan costs $8.99/month so you've paid $296.67 total.
Your average price per rental was approximately $2.88 each.
Average rental costs elsewhere are $3.75 each (not including late fees).
You've saved approximately $89.58 over that time period or $2.71 per month.

Here's some more about your renting habits:

You kept each rental for around 8 days on average.
The longest you kept a single DVD was 40 days.
You rented about 3 DVDs each month.
You're not taking full advantage of your current plan. You could be renting 6 DVDs each month.

It looks like we aren't getting the value that I hoped for out of Netflix. The price of $2.88 a movie is pretty high especially considering the $1 Redbox option. I take a little fault with the last line about taking full advantage and getting 6 DVDs a month. I think you'd have to watch even movie the same day and get it back in the mail for that to happen. So while it may be possible, it's hardly practical. (Side Note: I think that 40 day Netflix thing was an extended vacation to Australia. At the time, I looked into pausing the account, but with the dates it wouldn't have really worked out.)

If we go with the $16 plan and don't want any streaming movies for the month, we'll end up paying $5.12 per movie - a price that would have kept Blockbuster in business. Of course, it would be silly to pay for the $16 plan if you are only going to use the one-DVD at a time option that could be $8. For me it becomes an issue of, "How much do you pay for having the option of doing something (in this case watching streaming movies), even if you aren't likely to doing it?" I'm not sure I have a definitive answer for that.

What are your thoughts on the Netflix pricing change? Are you going to keep both streaming and renting by mail? Are you picking one over the other?

Posted on July 15, 2011.

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12 Responses to “Thoughts on Netflix’s Pricing Changes”

  1. […] Lazy Man & Money blog had the most rational take I’ve seen so far. Uncategorizedbusiness, netflix ← PlayOn Thoughts Four Weeks […]

  2. Big-D says:

    I know exactly why they did this. As someone who was looking to invest in netflix, I read their annual report, and this was all clear as day in it. Netflix got their streaming option from a $10 million agreement with STARZ, who had a poorly written contract w/ the major studios. This loophole in the contract allowed STARZ to resale the movie catalog they use to anyone. That agreement goes away at the end of the year and STARZ has to re-negotiate its contract. The major studios have already said they are going to close that loophole in the STARZ contract, and force Netflix to pay at a minimum of $150 million a year to have their movies (after the 60 day wait for dvds to come out).

    So, Netflix is doing two things. They are getting their data ready for their negotiations with the movie studios and clarifying their customer base. If the DVD option is still a valid business, and sustainable, then enough people have to use this product and pay for it on its own. The same goes for the streaming. They have to see if this is something they can make money at since the studios are intent on killing Netflix in lieu of their DVD market. So if only 1 million people sign up for the streaming, then they know they cannot afford a $150 lump sum payment to the studios, and as such will not offer it anymore. If they get 10 million people, they can afford the payments and make money and all is good.

    The final piece as to why this is happening now, is to get cash. They need cash so that they can pay that $150 million when it occurs at the end of the year.

    From a pure business perspective, this all makes sense. From a customer standpoint, they changed what they are doing. Did you really think that Netflix would be able to offer what they were without the Hollywood Studio’s crying foul and either suing the pants off Netflix or stopping them by charging them fees into the ground.

  3. Paul says:

    A better cost calculator might be:
    http://feedfliks.com
    since it take since it takes in account your streaming too.

    164 DVDs returned since July 2008
    Average time you keep DVDs at home: 4 days
    Movies/month: 4.6 by DVD | 19.8 by IW
    Your cost: $1.97 per DVD | With IW: $0.37

    Personaly I’ll be going streaming only. If I need a new release I’ll use Redbox or Vudu.

    • Lazy Man says:

      Big-D,

      That makes sense. I had heard that the studios underpriced their online content and were looking to raise fees. Using a loophole would seem to support that. It’s interesting that you mention Starz, because I was thinking that my OnDemand from Comcast tends to have a lot of Starz movies that are similar to Netflix Instant Watch in quality and that I might as well just go with OnDemand. Turns out they are probably using the same loophole.

      I know from a pure business perspective it makes sense. From a customer standpoint, did you really think that people were going to shrug their shoulders and say, “Sure, raise my rates 60% and offer me nothing in return.” If movie studios want to sue the pants off of Netflix or stop them by charging them fees into the ground, streaming video is probably not a sustainable business model and Netflix should get out of it. If the movie studios and Netflix can’t work together there is no business.

      Paul,

      I think that is the service I was looking for originally. It shows my cost as $3.04 for DVD or $1.56 with IW. I’m betting that it counts each episode of Arrested Development as an IW even though it’s 22 minutes long and an actual DVD may have 4-6 episodes. I think that inflates the numbers quite a bit.

  4. Christine says:

    I’m thinking we’ll switch to the streaming only, because my kids watch a lot of streamed video, but we don’t watch as much on DVD. Though we are disappointed with the sudden unavailability of some shows we were watching streamed. We’ll go back to borrowing movies from our library for $1 per week.

  5. Jeff C says:

    I will be canceling, not because I don’t feel its a fair value still but because I still have Xfinity. I am not going to cancel Xfinity yet and they offer plenty of streaming. As far as Dvd’s go I just don’t turn them enough to warrant keeping Netflix.

  6. Big-D says:

    Lazy man – I have a couple of things to say about your comments. First of all I talked from the business perspective – not the customer perspective. As a consumer of Netflix, I hate it that my prices go up. However, when I get past the “OMFG – the world is coming to an end !!” reaction, I have to re-evaluate my business relationship with netflix. I am going streaming only for $8 and saving 2 bucks. That is me. I just look at it as a cell phone company raising prices (which mine is – Virgin Mobile), or anything else. All a continual purchase (such as cable, gas, electric) is a monthly purchase of a product, which has to be re-evaluated continually to see if there is value. My cable just went bye-bye because it was not worth $40 a month for basic cable, a DVR, and HD channels.

    As for the movie studios and netflix working together? Really? You see that happening. They control the delivery mechanism, the content, and the distribution. They were not going to sue Starz, they were going to close the loophole that allowed netflix streaming to exist. They are going to make netflix pay through the nose to keep their service so that they can continue to get rich (Sorry, recover lost income due to decreased DVD/Blu-Ray sales). I am just saying that I really preferred a simple way to get my content, and from what I see in the future, I only get to cringe. The major studios are looking to try to get people to buy a service from each major studio to see only that studios movie catalog. So if you want to see a movie from Mirimax, you have to join Mirimax’s service, and Universal, and Sony, and Columbia, etc. That way they don’t loose control of the content and they own the distribution and the delivery mechanism.

    Sustainable business has nothing to do with all this. Fear of change does.

    Please do not take any of this as an indication that I am not agreeing with your major points in your article. I am not trying to disagree – just bringing up other view points.

  7. G. says:

    I’m still stuck. I feel that I might have to bite the bullet. Most people would like to keep streaming and cancel the mail in DVDs. Why? Because they can use RedBox. My issue with RedBox is that the options are very limited. Example: I was with friends, they asked If I seen a random movie from 97, I had not, the entire group is shocked. “You must watch it Its the best moview ever!!!” Well now what? RedBox isn’t going to have it. What do I do??

    • Lazy Man says:

      I hear you G. I personally don’t want to keep the streaming and will go with the DVDs because we have quite a queue of random movies from years past.

  8. […] expensive. They often hook you into $15 a month deals billed automatically to your credit card. That's Netflix money now. Still, in the right circumstances it could be worth […]

  9. Ryan says:

    I found that I don’t really use the streaming version of netflix all that much since the selection was limited so at that point I just went to redbox since I watch about 4-5 movies a month anyways. Not really worth it to spend twice as much when redbox is right by where I work.

  10. […] a business that ships DVDs and a business that streams media over the Internet. This follows on the Netflix's controversial pricing change where they raised rates for many consumers by 60% by splitting the $10 business and making it two […]

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