3 reasons why Netflix has to raise prices in 2014

Was Amazon's announcement that it would raise its Prime membership price to $99 well-timed or not? The answer to that could affect whether Netflix and other subscription video on demand (SVOD) services move to raise their prices, too.

A poll conducted by Brand Keys just two days after the news broke said that the online retailer's "brand engagement rating" fell 10 percent, from 93 to 83 percent, immediately after the announcement, according to a BGR story. And message boards at various websites lit up, with commenters raging that the Prime membership isn't worth its current price, much less a higher one.

But does that make the price rise ill-timed? I don't think so. Here are a few reasons from an online video standpoint why raising subscription prices is likely in our future:

1. The cost of content continues to climb.

This one is a given: Content providers, from movie studios to sports broadcasters, have continually hiked the fees to license their content to both online video providers like Netflix and Amazon, and to traditional cable and satellite operators. Retransmission fee hikes of 100 percent are becoming almost routine, despite highly public tugs-of-war between cable operators and providers like ESPN, Viacom and others.

Netflix and Amazon now negotiate with providers for exclusive rights to much of their highly-viewed content, like popular TV series.

Netflix's original content, meanwhile, has grabbed a devoted following. But it needs to keep funding production of series like "Lillyhammer" (which was renewed for a third season), "Orange Is The New Black" and "House of Cards," which reportedly costs $100 million.

2. Consumer demand for online video is at an all-time high.

Viewers are jumping online to watch content in a big way. A 2013 survey by Accenture found that 90 percent of U.S. consumers surveyed watch online video on any type of connected device (computers, smartphones or mobile devices).

Subscription video on demand saw a 32 percent increase in subscribers in 2013. Meantime, DVD sales fell 8 percent and rentals dropped 19 percent, while digital movie sales soared 47 percent, according to Digital Entertainment Group.

And viewers are joining the online video ranks in numbers that are straining the infrastructure in several regions at various levels. Which leads to the next issue:

3. Managing OTT delivery is complex and costly.

The HBO Go debacle two weeks ago, when "True Detective" fans were unable to watch the series finale via the online app, is just one symptom of the growing pains that the Web is going through right now when it comes to reliable content delivery.

Add to this the higher-bandwidth requirements of new video technologies like 4K and MPEG-DASH and the creaky broadband infrastructure in many parts of the United States is likely in for a rough time.

The nation's broadband infrastructure doesn't seem like a direct concern for SVOD providers, but routing online video around choke points is a pretty complex task--which translates to higher costs for every company involved in OTT delivery.

A December 2012 column by Dr. Jorn Kreiger pointed out that: "To serve the viewing needs of a mass-market audience, the content delivery network costs for OTT streaming services would have to fall by a factor of as much as 25,000 just to reach parity with conventional broadcast technologies," he said, citing an IHS Screen Digest study.

Those factors will play a big role in any rise in Netflix's subscription rates. But is a price rise inevitable? A couple of things might stall it:

  • Consumer resistance to increased pricing. The 2013 Accenture survey found that 54 percent of U.S. consumers polled would not be willing to pay for premium content offered on YouTube, while 19 percent would be willing to pay about $2 per month for such content.
    That doesn't necessarily mean subscribers will flee if Netflix implements a moderate rise in price. YouTube is essentially a free service, and the jump from getting video content for free versus paying--even just a couple dollars a month--can be a big one.
  • New advertising models that negate a price rise. Wait a minute, you say: Netflix doesn't have ads on its website or device app. But that doesn't mean it will never implement an advertising model.
    A couple of decades ago, PBS started running sponsor ads before and after many of its programs. Viewers of "Downton Abbey" on linear television see this in action each week with a trendy Ralph Lauren ad bookending each episode. That transition was not made without controversy, but nonetheless those ads were integrated, without breaking up the otherwise noncommercial content of the service.
    In a February column, Will Richmond of VideoNuze talked about the possibility of a hybrid SVOD model for Amazon, which might give viewers a choice of a reduced or free subscription to Prime Instant Video in return for receiving targeted ads. And in fact, Amazon just signed a deal with Freewheel to power its video ads. Other services like Netflix or Redbox could try this option as well.

In any case, SVOD providers need to continue raising funds to pay for the increasing cost of supplying video to all of their subscribers, all the time. The current pricing models just don't seem to cut it in the long term.--Sam