Top Reasons Why Netflix Raised Rates for DVD, Streaming Plans

Netflix is changing its pricing plans in the US market - eliminating the bundling of streaming with DVD by mail programs.

We are separating unlimited DVDs by mail and unlimited streaming in to two separate plans to better reflect the costs of each. Now, our members have a choice: a streaming only plan, a DVD only plan, or both, Netflix said in an email to subscribers.

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As a result, the current $9.99 a month membership for unlimited streaming and unlimited DVDs will be split into 2 distinct plans:

Plan 1: Unlimited streaming (no DVDs) for $7.99 a month

Plan 2: Unlimited DVDs, 1 out at-a-time (no streaming) for $7.99 a month

This is the second time Netflix has raised prices in the past 8 months.

The separation of the unlimited streaming plan (still $7.99/month) from the unlimited DVDs by mail plans (previously viewed as an add on to the streaming plan) has raised prices significantly for each of the combination plans.

Here is a gist of the new plan:

* One DVD out at-a-time now costs $15.98/month (up from $9.99/month). Two DVDs out at-a-time costs $19.98/month, up from $14.99/month. Three DVDs out at-a-time costs $23.98/month, up from $19.99.

* Unlimited DVDs by mail-only plans, previously available until the introduction of streaming in 2007, will cost $7.99/month for 1 DVD out at-a-time, $11.99/month for 2 DVDs out at-a-time, and $15.99/month for 3 DVDs out at-a-time.

In other words, Netflix will no longer be offering plans that include both unlimited streaming and DVDs by mail. Netflix's streaming remains at $7.99/month, but unlimited streaming plus 1 DVD will now cost $16/month (up 60 percent) and unlimited plus 2 DVDs will cost $20/month (up 33 percent).

The plan changes will be effective immediately for new subscribers, and the new prices for existing members will start for charges on or after September 1.

On Netflix' blog, the company noted that the change will separate the plans to better reflect the costs of each, helping ensure a long life for DVDs by mail. The site further noted that treating DVDs as a $2/month add-on to unlimited plans didn't make much financial sense given shipping/postage costs.

Let's take a look at the possible reasons why Netflix may have opted for the change in plans.

In our view, the company is facing increasing pressure from content providers to base streaming content costs on the number of overall subscribers, Wedbush Securities analyst Michael Pachter wrote in a note to clients.

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 growth in 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 wrote.

The analyst had earlier estimated that Netflix' streaming costs could rise to between $1.6 - 2.2 billion in 2012 and now believes that content costs are tracking closer to $2.2 - 2.5 billion, perhaps providing the catalyst for today's action.