Raising Prices Could Cost Netflix 2.5M Subscribers

Jennifer LeClaire, <a href='http://www.newsfactor.com'>newsfactor.com</a>

Netflix is already feeling the pain of raising prices essentially 60 percent for its DVD and streaming videos service. Although Netflix subscribers have surpassed the 25 million mark, a survey from The Diffusion Group estimates about 2.5 million subscribers will drop the service when the price hike goes into effect in September.

Netflix recently announced it is launching new unlimited DVD-only plans in the U.S. at $7.99 a month for the one-DVD-out-at-a-time plan and $11.99 for two DVDs at a time. The unlimited streaming plan will remain at $7.99 a month. The price for getting both unlimited streaming and unlimited DVDs will be $15.98 a month. The changes go into effect on Sept. 1 for existing members.

"Simply stated, Netflix has been on a rip, fueled by a growing base of very satisfied consumers -- especially when it came to streaming-video users," The Diffusion Group said in a report. "At the same time, Netflix was spending a fortune to buy distribution rights to better content on better terms and planning for rapid international expansion."

Netflix's Reasoning

Netflix's second-quarter earnings statement hinted at the reasoning behind separating pricing for the DVD and streaming combo pricing: "During the quarter, the streaming-only plan continued to gain in popularity, with nearly 75 percent of our new subscribers signing up for it. With the rapid adoption of streaming, DVD shipments for Netflix have likely peaked."

"Our estimate is that by end of Q3 in the U.S., we'll have about 22 million people subscribing to our streaming service, about 15 million people subscribing to our DVD service, and about 25 million total U.S. subscribers (with about 12 million people subscribing to both streaming and DVD)," it added.

By Netflix's own admission, it could lose up to three million subscribers over the model change. But some analysts still expect Netflix to perform well over the long haul.

A Fundamental Change

Charles King, principal analyst at Pund-IT, said Netflix took an interesting approach when it offered streaming service free for months. It was a move that allowed Netflix to pique the interest of its customer base and see if there was a viable business model.

"Over the years we've seen consumers cry when vendors attempted to begin charging for what had been a free service up until that point," King said. "Netflix may have the final word here because there are very few other options and there are no other options that I am aware of that have the breadth of options that Netflix does."

Although as a customer King doesn't mind paying the price increase for both DVD and streaming content, he said announcing a price increase during a difficult economy is obviously going to rub people the wrong way. Still, for consumers who are already paying $60 or $70 a month for cable television, an $8 charge for 24-hour streaming per month seems like a drop in the bucket to King.

"We are going through a period of fundamental change both in the Internet and in the way that people are using it. People are accessing the Internet with entirely new generations of devices from any place at any time," King said. "The Netflix streaming service is one that can be adapted in numerous ways that haven't even been explored yet. If money runs toward quality, as the old saying goes, then the company should be fine. But that doesn't mean that people won't be ticked off."