NEW YORK - Why is Netflix raising its prices? In part, becausethe company miscalculated how many people still want to receive DVDsby mail each month, a more expensive service to provide comparedwith its streamed Internet videos.
Netflix has been trying to lure subscribers away from its DVDs byoffering cheaper plans that include movies and TV episodes deliveredover its Internet streaming service. In November, it began offeringa streaming-only plan for $8, its cheapest option at the time. YetNetflix customers aren't flocking to Internet video as quickly assome analysts said the company expected.
Many consumers are unwilling to give up the signature redenvelopes. DVDs feature newer titles and the latest theatricalreleases that aren't available through the company's streamingservice.
So the company is adjusting its pricing to reflect the cost ofits DVD business and to help bring in more money to cover growingexpenses for streaming content.
Under the new plan, customers who want to rent DVDs by mail andwatch video on the Internet will need to pay at least $16 per month.Netflix had been bundling both options in a single package for aslow as $10 per month. But that bundled plan "neither makes greatfinancial sense nor satisfies people who just want DVDs," wroteJessie Becker, Netflix Inc.'s vice president of marketing, on acompany blog Tuesday.
The price hike serves multiple purposes, analysts say. It willlikely push more people into the streaming service, which will helpNetflix to lower its postal expenses. The cost of shipping a DVD canbe as much as 75 cents per disc, while analyst Mike Olson of PiperJaffray estimates that it costs just 5 cents to 10 cents to delivera movie over the Internet.
At the same time, Netflix needs additional revenue to build upits streaming service. In the first three months of this year,Netflix spent $192 million on streaming rights after putting $406million into the library last year. Licensing costs are expected tojump to $1.3 billion to $1.4 billion next year, said Arash Amel,research director for digital media at IHS Screen Digest.
"Netflix is under enormous pressures from the content owners towrite bigger and bigger checks," Amel said. "It had to find themoney from somewhere."
Netflix had 23.6 million subscribers in the U.S. and Canada atthe end of March, double the amount from the same period two yearsago. Its stock has more than doubled in value over the past year,compared with a 21 percent gain for the Standard & Poor's 500 index.
Movie studios and television networks want to capitalize onNetflix's success by getting the company to pay more for content.
In an example of the growing tension, Sony movies were pulledfrom the Netflix online streaming service last month because of whatNetflix described as a "temporary contract issue" between Sony Corp.and its pay TV distributor, Starz. The issue remains unresolved.
Netflix's contract to receive content from Starz ends next year,and analysts say Netflix will likely pay a significant amount torenew it. Netflix CEO Reed Hastings said it "wouldn't be shocking"if Netflix paid more than $200 million per year for Starz' service,far more than the estimated $30 million a year it is payingcurrently.
Netflix also wants to bring in more money because, as the companyhas grown, it is making less per subscriber. It got a monthlyaverage of $11.97 per subscriber in the first quarter of this year.At the end of 2006, before Internet streaming was launched, theaverage amount paid per subscriber was $15.87 per month.
Still, the increased pricing has alienated Netflix's customers,who have taken to Facebook and Twitter to complain about thecompany's move. Amel, of IHS Screen Digest, said Netflix hadtarnished its brand image by surprising customers with the pricingchange. But he said consumers should expect Netflix to push themtoward Internet streaming going forward.
"Netflix's future is not in the DVDs," he said. "Netflix's futureis in the business of premium pay television delivered over theInternet."
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