Well done to Engadget for first spotting the rumor that Netflix was raising prices. Netflix has made it official:
First, we are launching new DVD only plans. These plans offer our lowest prices ever for unlimited DVDs – only $7.99 a month for our 1 DVD out at-a-time plan and $11.99 a month for our 2 DVDs out at-a-time plan. By offering our lowest prices ever, we hope to provide great value to our current and future DVDs by mail members. New members can sign up for these plans by going to DVD.netflix.com.
Second, we are separating unlimited DVDs by mail and unlimited streaming into separate plans to better reflect the costs of each and to give our members a choice: a streaming only plan, a DVD only plan or the option to subscribe to both. With this change, we will no longer offer a plan that includes both unlimited streaming and DVDs by mail.
Netflix Customers Rend Clothes, Dress In Sackcloth
Netflix’s rather prompt and large change has shaken up their loyal following. The internet angry mob is very much out to get Netflix at this point. For a good feel of the anger out there, I recommend the ZDNet article’s summary of Facebook and Twitter posts. Some choice nuggets:
First, there are the comments on the announcement blog post itself. These are pretty dire.
“Are you F#**!!@! kidding me?”
“Way to go again Netflix – Divide and Conquer – EPIC FAIL!!”
“I know I’ll be cancelling my service and going with Blockbuster soon.”
“Sept.1 I’ll be canceling.I do without cable I think I can do without Netflix.”
“Peace out. You’re streaming selection is horrible anyway.”
“Thanks netflix, you just increased my bill too! Currently I am paying 9.99 for 1 DVD and Unlimited Streaming and you want me to pay 15.98!? Tell me how that is cheaper than 9.99.“
Let’s not forget Facebook
the only way that this is terrific for the customer is if you plan to offer your entire collection available for streaming…. otherwise this is just yet another way to choke more change out of your customers…. I mean… are you guys really that strapped for cash? or are you just greedy? ALSO, what a great way to treat you long term customers, we REALLY appreciate it…i can understand you applying it to new customers… but please, explain to me who’s brilliant idea this was… I hear it going like this ” Hey I have an idea of how we can show appreciation to our long term valued customers… let’s take MORE of their money, that way they REALLY feel valued!”….IDIOTS.
Yes, they really are that cash strapped, but I’ll get to that in a minute.
I think that folks are so pissed because the Netflix Streaming + 1 DVD deal was amazing. It was effectively Hulu Plus ($7.99 / month) but without ads and running on a TV combined with the Blockbuster 1 DVD a month plan ($11.99 / month) for 10 bucks. It was a steal. Now it’s just a good deal at $15.98. After the dust settles, people are going to grumble and go back to their Netflix crack.
Basic Netflix Costs and Financials
Netflix is cash strapped and trying desperately to land new streaming content deals, and the streaming content is getting crazy expensive. Look at the signs:
- Hulu disclosed parts of their Q2 results, and noted that they spent about $8 on content costs per Hulu Plus subscriber (which explains the ads). Hulu is paying for first-run shows.
- Netflix originally signed content deals that were costing it a total of $180 million per year. That figure is expected to jump 10x to $1.8 billion.
- The Starz deal included a cap on the maximum number of streaming video users who can access the videos. Netflix crossed that number. They’ll be crossing it in other deals soon.
DVD aren’t cheap either. It costs Netflix about $1 to ship a movie out and back. If Netflix’s streaming package was well priced at $7.99, two DVDs will eat the price difference between the current streaming-only ($7.99 / mo) and the streaming + 1 DVD ($9.99 / mo) packages. This move is signaling that Netflix wants first run content and that they’ll be using up a good portion of that $7.99 streaming cost to pay for that first run content.
Also consider that Netflix doesn’t appear to have as much money to play with as it should. A Seeking Alpha analyst has concluded that despite Netflix reporting a profit, they’re cash-flow poor and are short on cash to use in funding new endeavors:
In other words, over the last quarter, Netflix earned around $116MM in operating cash flows but most of this (at least $77MM in rising payables) is not actually real cash flow. That means Netflix only earned about $39MM in operating cash flow last quarter.
But wait, it gets even more strange. Of that $39MM the company earned, another 22MM of it came from “accrued expenses” and another $15MM came from “deferred revenue.” I know it seems pretty crazy, but Netflix didn’t actually earn any money last quarter.
This is why Netflix is making the move in a drastic fashion. It’s a large increase for a segment of the Netflix users and the increase does not grandfather in existing customers. Netflix cannot afford to take their time with a transition band or bleeding for a bit. Netflix’s CEO has said that they’ll treat DVD and streaming as two separate business units. By breaking into the two clear services, it allows Netflix to upgrade the streaming and give both sides what they really want.
Stick It To The Netflix Man
One thing I did see in all the angry outbursts were threats to go to other competitors, start using Redbox more aggressively, and so on. “That’ll show Netflix!” they cry. Probably not. I suspect that the customers who are most upset are those that Netflix was losing money on. If the customer was running streaming video and burning a hole in their Unlimited DVD plan, that $1 per DVD shipping costs was killing Netflix. You leaving will not upset Netflix. It’ll increase their profitability.
All that said, if someone wanted to stick it to Netflix, they’d rent as many movies as they could right up to the September 1st changeover deadline.
Other Summaries From Around the Web
Update: Lazy Man & Money blog had the most rational take I’ve seen so far.