Netflix's price hike has little downside

Jim O'Neil

editor's corner
Just how popular is Netflix (NASDAQ: NFLX)? Well, a little less so this morning among some customers who were infuriated by the company's price hike for a combined streaming/DVD-by-mail service that it announced yesterday.

The nearly 60 percent bump to $15.98 a month from $9.99 produced a flood of complaints on the company's website with many customers vowing to quit the service.

A number of pundits also predicted Netflix would see huge subscriber losses as a result of the move. A BNET article proclaimed, "Thanks to Hollywood, Netflix is pricing itself out of business;" CNET said, "Angry Netflix subscribers must ask who has the better deal;" and PCMag asked, "Is Netflix doomed?"

Less vocal was the audience that has helped to nearly triple the number of subscribers since Netflix began offering movies online in late 2008 when the service counted fewer than 9 million members. Their cost per month just dropped $2 to $7.99, the same price as Hulu Plus, so they have no reason to complain.

Also without reason to complain is Wall Street, which continued to back what many have seen as an over-valued stock even as its price has escalated nearly $196, some 66 percent, in the past year; Netflix yesterday traded above $300 per share for the second day in a row and closed at $291.27.

Investors see increased value in Netflix because the new pricing plan will mean lower costs and potential for higher revenues as it sheds expensive DVD-by-mail customers. And that, of course, means it potentially will have more cash to pay the higher digital licensing fees it expects to see in the coming year.

Michael Pachter, an analyst at Wedbush Securities, said he expects Netflix's content costs to balloon from $180 million in 2010 to $1.98 billion in 2012.

Separating its streaming customers from its DVD-by-mail customers also could help Netflix regain streaming rights to the library of Sony content from Starz that it lost access to last month. Sony pulled their titles back because of a clause in its contract that limited the number of people who could access movies online.

The pricing change also is likely to bring a smile to faces in Hollywood, who see the move as an opening for video-on-demand services that have higher earnings potentials for them, but which have been essentially languishing unused as consumers opted for the lower-priced Netflix offering.

Also in line to see some benefits from disgruntled consumers? Dish Network's Blockbuster Video stores, Redbox--which offers $1 rentals from thousands of kiosks across the country--Amazon and VOD services like iTunes and Vudu that now may appear as bargains.

The big question, of course, is, "Will Netflix really be hurt by the price hike and the adverse publicity it has generated?"

Despite the angry rhetoric and predictions of doom, I don't think so.

For most subscribers, at least the 60-odd percent who've joined since Netflix started offering streaming video, forcing a choice of either/or for $7.99 and a combo for $15.98 may simply mean opting for the cheaper plan. For the others? Well, just look to the world of pay TV for guidance there. Despite relentless price hikes, it's still going strong.

In Netflix's case there is, after all, strength in numbers. The outcries of 10,000 or even 20,000 angry customers can sound pretty muted amid the happy murmuring of nearly 24 million contented ones.

Its $7.99 price, to a younger audience that views snailmail as a place where credit card offers and other junk mail accumulates to be thrown out once a month, now looks like an even better deal. Combine it with a $7.99 Hulu Plus subscription and life, for $15.98 a month, has just taken a turn for the better.--Jim