Tuesday, Netflix announced that its pricing and plans were changing,
which resulted in a price hike for users that currently only pay $9.99 for DVDs
and streaming. Effective September 1 (for existing customers), this price will jump to $15.98, while
DVD-only plans and video streaming only plans are $7.99 for one or the other.
This angered Netflix
customers to the point that Netflix had to bring in additional
customer service representatives to handle the amount of phone calls pouring
in. Customers also voiced their opinions on social networks like Facebook and
Twitter, saying that the pricing was sudden and unfair.
But Netflix has outlined a couple of reasons as to why it has
made these price changes according to USA Today. First, it underestimated the demand for DVD rental.
Second, it has to cover the expenses for licensing rights from movie studios
and television networks in order to provide better content.
Netflix has been working to move customers more toward streaming since
November, when it released a $7.99 streaming-only plan. This is because DVDs
are more expensive to ship at 75 cents per disc, while sending a streamed
internet video only costs about 5 to 10 cents.
But with much of the newer releases being DVD rentals only, Netflix customers
have flocked to this particular service while still enjoying content that is
part of the streaming service as well.
This demand for DVDs led Netflix to both introduce a DVD-only plan for $7.99
(as well as the steaming-only plan for $7.99) and to heighten the price of
DVD/streaming bundle packages from $9.99 to $15.98.
While adjusting prices and plans for DVD rentals was an important step, Netflix
also understood that it had to beef up the streaming service by making more
movies/television shows available in order to lure customers in that direction.
To do that, it needs streaming rights, and streaming rights are pretty
In the first three months of 2011, Netflix spent $192 million on streaming
rights. Last year, it spent $406 million on its streaming library. Next year,
licensing rights costs are expected to jump between $1.3 billion and $1.4
billion, mainly because movie studios and television networks want a large
piece of Netflix's successful
pie. As of March 2011, Netflix had 23.6 million users.
"Netflix is under enormous pressures from the content owners to write
bigger and bigger checks," said Arash Amel, research director for digital
media at IHS Screen Digest. "It had to find the money from
Netflix also has a desire to bring in more money as it grows, since it has
actually lost money over time. At the end of 2006, Netflix received a monthly
average of $15.87 per subscriber (this was before streaming launched). During
the first quarter of this year, it received a monthly average of $11.97 per
quote: Its close enough.