Netflix Price Hike: Forcing the Consumers’ Hand

Right now there is little difference between Netflix and a divorced parent forcing their kids to make a choice.

That's becasue Netflix has essentially forced its consumer's hand. Either go with streaming or go with DVDs or go somewhere else. The company has kept its mailing DVD service but it no longer is bundled with the streaming plan. Unlimited streaming costs users $7.99 per month. Unlimited DVDs (at one per month) cost $7.99 per month. Unlimited DVDs for two at a time costs $11.99. The price continues to go up per DVD.

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Previously, Netflix offered a packaged deal at $9.99 per month. However, the company said having a $2 add on for DVDs didn't great financial sense or satisfied people who just want DVDs. Now the combined price is in the neighborhood of $16 per month.

The company says by separating DVDs by mail from streaming, it ensures a long life for DVDs. Analysts, however, aren't as sure about that.

Netflix can spin this any way they want, but the bottom line is that they simply want to get out of the DVD business as fast as possible so they can take that money and use it to license more content for streaming, Dan Rayburn, analyst with Frost & Sullivan, said in a blog.

Obviously, Netflix can't get out of DVDs too soon as most of its content is still on the traditional format. However, Rayburn says Netflix is looking to take money they will not longer have to spend on DVDs and license more content for streaming purposes.

Right now, Netflix's streaming option has movies to choose from but most aren't what the consumers want. Of Netflix's Top 100, only eight are available in streaming.

Financially, the mail by DVD business has been a burden on Netflix. According to most financial analysts, Netflix spends more money on sending the DVD out than the subscription rate ($2 added on to the streaming plan). Bank of America analyst Nat Schindler says Netflix spend 80 cents on shipping every time a DVD was sent out. If it's sent out three times per month, Netflix loses 40 cents.

We believe the move shows that Netflix's old pricing model was unsustainable as the company was losing money on a cash basis, which it masked through accounts payable increases and accounting treatments on the income statement, Janney Capital Markets analyst Tony Wible said in a note.

For consumers who still want a DVD service, company's like Redbox and Blockbuster are emerging as early winners from the Netflix price hike. Redbox has 27,000 locations that allow consumers to rent DVDs at $1 per day.

Another potential winner is Blockbuster, which used to be a retail VHS/DVD powerhouse, fell behind Netflix, declared bankruptcy and was bought out by DISH. It has its own streaming plan, Blockbuster On Demand. However, unlike Netflix, Blockbuster On Demand consumers have to pay per title.

According to Michael Pachter, Netflix may have something even crazier in mind than simply phasing out DVDs.

By bifurcating its subscriber base into streaming and non-streaming plans, the company may be able to successfully argue that a lesser number of subscribers access streaming content, and may be able to control streaming content costs. Our central thesis has been that the company's streaming content costs are rising faster than its revenues; today's move reinforces our conviction that this thesis is correct, Pachter said in a note.

Follow Gabriel Perna on Twitter at @GabrielSPerna