Print 83 comment(s) - last by lazylazyjoe.. on Jul 22 at 4:48 PM

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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RE: Screwed either way
By Motoman on 7/18/2011 11:19:55 AM , Rating: 3
Not for everyone.

About 80% of the US population lives in urban areas - if we presume that *all* of them can get sufficiently high-speed internet access, then that's great for them.

The other 20% lives in rural areas...frequently with no high-speed internet access at all, or with not-really-high-speed access available. I am on 3Mb DSL, which is absolutely the fastest available to me...after having gotten by on satellite internet for several years...which is best chracterized as "better than dial-up...maybe." And I have other friends now using cellular air cards because they're at least not as bad as satellite.

For at least a fifth of the US population, streaming isn't the future. We tried Netflix streaming, as have many of our friends who also live with similar connection speeds - it's not usable. Everything else is just great...including MMORPG gaming, which requires amazingly little bandwidth. But streaming is a non-starter.

And before you get too bent out of shape as to being out in "the sticks" I'll point out that in 30 minutes I could be parked in a major city, and where we live is definitely considered part of the overall metro area, where something like 4 million people live. Not an area many people would consider to be all that "rural," really.

RE: Screwed either way
By Reclaimer77 on 7/18/2011 12:04:52 PM , Rating: 2
But Moto by your own numbers, which we'll use for arguments sake, you can plainly see that marketing to 80% of a base is more profitable than the 20%.

For at least a fifth of the US population, streaming isn't the future.

Sure it is. Better broadband is in their future, thus, streaming. If, in fact, a whole fifth of the country has broadband options as poor as yours.

Curiously, 3mb DSL should be enough to stream standard definition Netflix just fine. So how is it that Netflix isn't "usable" for you guys? If you can watch Youtube, you should be able to watch Netflix.

RE: Screwed either way
By Motoman on 7/18/11, Rating: 0
RE: Screwed either way
By Spuke on 7/18/2011 1:19:56 PM , Rating: 2
Broadband is definitely coming to the sticks!! One of the local ISP's is offering wireless internet for those that live in the boons. The cool thing about wireless is you get the same speed up and down. It was 1.5M until two months ago when they upgraded to 6M. I consistently get 4.5 to 5M. No issues with Netflix at all. Even the ISP's owner (sometimes he answers the phone personally) calls our antenna "the Netflix antenna". The connection is so stable I even got a Hulu Plus account. I can actually watch Youtube videos in HD (I had to wait for it to buffer before on SD). I would check around and see if there's a local ISP that offers better services.

RE: Screwed either way
By JediJeb on 7/18/2011 3:44:12 PM , Rating: 2
I have a 1.5M connection through ATT DSL and I can run netflix pretty well. Only occasionally do I get a buffering and that is when something decides to update on my computer running in the other room. I do only have SD since I am still using my 31" Mitsu CRT but the pic on it is probably better with Netflix than it is with DirecTV.

I am about 5 miles out from town and we just got DSL here last year, and I am near the end of the line. It may be coming to everyone but it definitely isn't here yet. Also with the hills here it would be hit or miss for most wireless broadband because even though I have full cell signal at my house, a quarter mile down the road has no cell signal at all.

I also would consider your 20% rural population pretty conservative, I think there are more people living outside the reach of most broadband than gets counted as such.

RE: Screwed either way
By adrift02 on 7/18/2011 12:47:34 PM , Rating: 2
My in-laws had DSL and it didnt end up even close to the rated speed. DSL drops off considerably over distance compared to cable.

Netflix would constantly drop below full SD, was pretty annoying.

RE: Screwed either way
By InsaneScientist on 7/19/2011 4:07:09 AM , Rating: 2
Curiously, 3mb DSL should be enough to stream standard definition Netflix just fine. So how is it that Netflix isn't "usable" for you guys? If you can watch Youtube, you should be able to watch Netflix.

Because a 3Mbps DSL plan = 1Mbps average downstream bandwidth with peaks and valleys so bad that an ECG would compare favorably to a graph of the throughput.

Oh, plus the monthly (or more, depending on how far from the DSL office you are) instances of things dying, and having to reset everything.

I wish I were making this up. But every single one of my clients with DSL sees problems like this. The sole client that doesn't suffer from monthly resets is a local school with (two) "business" class lines - which still only get ~70% of the rated bandwidth on a good day - and even there I occasionally have issues with the DSL lines.

Sorry about that...

RE: Screwed either way
By Motoman on 7/19/11, Rating: 0
RE: Screwed either way
By Spuke on 7/18/2011 1:10:13 PM , Rating: 1
About 80% of the US population lives in urban areas - if we presume that *all* of them can get sufficiently high-speed internet access, then that's great for them.
No, about half live in urban areas in the US but good point anyways.

RE: Screwed either way
By kingmotley on 7/18/2011 2:03:43 PM , Rating: 2
No, about 79.219% live in urban areas to be more exact with 20.781% living in areas considered rural as measured in the 2000 census.

RE: Screwed either way
By smithme08 on 7/18/2011 2:06:22 PM , Rating: 2
Jinx ;)

RE: Screwed either way
By smithme08 on 7/18/2011 2:04:31 PM , Rating: 2
According to the US census from 2000 (most recent for which I could find published results quickly) 79.219 percent live in urban areas, which most people would find acceptable to round to 80. Just putting a source to a tossed around statistic :)

RE: Screwed either way
By wyrmslair on 7/18/2011 5:19:23 PM , Rating: 2
Right there with you. I live in a suburb of Los Angeles County that sits directly above Orange County (The OC!). In fact, I went to school up through HS in the OC instead of LA County. So I'm definitely not in "the styx". That said, I cannot get any Verizon service above 3Mbps. If I was willing to go back to being raped by TWC, then I can get cable much faster but my options are very limited. Ironically, I live in a very affluent community but my friends and family members who are farther out from "the city" and/or in much lower income areas (where I'm assuming there would be a lower percentage of consumption for a "premium service") can get FIOS at 8 to 25 Mbps.

Folks, we are not truly a high bandwidth nation, even in the major metro areas.

"Nowadays, security guys break the Mac every single day. Every single day, they come out with a total exploit, your machine can be taken over totally. I dare anybody to do that once a month on the Windows machine." -- Bill Gates

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