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DVDs cost Netflix 75 cents each to ship while it only costs 5 to 10 cents to deliver the streaming equivalent.
The company underestimated demand for DVD rentals, and had to cover the costs of streaming rights

Last 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 expensive.

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 somewhere."

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 subscriber.



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Revenue gap
By Motoman on 7/18/2011 11:11:17 AM , Rating: 2
...while there's validity to other reasons given for the price hike, I think one key factor is getting overlooked...

People are famously dropping cable/satellite for going OTA/Netflix. So they drop their ~$60 a month cable bill, pick up a ~$10 Netflix bill, and there's a $50 gap in between those two. Which of course is what people are excited about saving...$600 a year.

However, would it not behoove Netflix to explore how much of that gap they can claim for themselves, before eroding their revenue? If they doubled their price from $10 to $20 a month, thereby doubling the revenue-per-customer, they'd only have to make sure that less than 50% of their customers dropped them - that'd be the breakeven point. If they double their price and only 20% of their customers leave, they are making a *lot* more money.

It only makes sense for them to try to find out exactly how much they can get away with charging for their service before they lose too many customers to make it viable. Indeed, it's what any business does...




RE: Revenue gap
By FITCamaro on 7/18/2011 11:40:58 AM , Rating: 1
If they could get new shows the day after its broadcast, I'd pay $30/month for it. I have no problem with the price if its justified. I have dropped my DVD plan though now. I just didn't use it enough to pay $10 for it.


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