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Netflix Pricing Changes

[Source] NSFW!! So reposting here.

Netflix's current pricing plan: The $9.99 I pay each month which buys me unlimited streaming of their movies, plus as many DVDs as I would like each month, but only 1 DVD out at a time. They offer 2-3-4-etc DVDs at a time plans, but eh, most of the stuff on DVD that I want to watch is pretty eclectic and only comes along every so often, so so why bother.

Netflix's new pricing plan: it will cost $7.99 for unlimited streaming, plus an additional $7.99 for the 1-DVD at a time plan.

Although existing customers are grandfather in until September 1st, obviously my first reaction to this gigantic rate hike was to have an aneurysm and vomit all over the place. But being the empathetic soul that I am, tried to look at this from Netflix's point of view. What prompted such a drastic shift in their priving scheme? Well, it's a two folded problem. First, let's look at the new challenges that now face their streaming side of the house.

When netflix first started streaming, the likes of Hollywood folks such as Stephen Spielberg, Michael Bay, and James Cameron weren't entirely sure if streaming movies was just a passing fad or not. So when Netflix approached them asking to license their media, eh, it was more of an experimental gestures on Hollywood's behalf. In 2010, the cost for Netflix to license all of their streaming movies was around $180 million dollars in fees paid out to Your Favorite Hollywood Entity. But with DVD/Blu-Ray sales down, now Hollywood sees that streaming media is indeed the way of the future and with more streaming players in the market (Hulu, Amazon, Apple, Google), rights to streaming media are becoming a rather lucrative commodity. What cost Netflix $180 million in 2010, is expected to cost them $1.98 BILLION in 2012. For those of you keeping score, that's an ELEVEN fold increase in licensing costs.

Now let's look at the mail-order DVD rental side of the house -- which I just want to go on record as predicting to die off within five years. Anyway, when Netflix first opened their doors back in 1999, the cost of mailing out one movie was $0.33 each way. Now twelve years later and it's $0.44, that's a 33% increase in costs. So every time Netflix mails me a movie and I sent back to them in their pre-paid envelopes, it costs them $0.88. Where I live, the turnaround time for a movie is two days after I order it -- so if I order it on Monday afternoon, it's in my mailbox on Wednesday afternoon. Let's say I watch it that night, and mail it back on Thursday -- if I get it into a mailbox before 10am, Netflix will receive it on Friday and mail me out another movie that afternoon. Lather, rinse, repeat. Turn around time for a movie: 5 days. Number of DVDs I can get mailed out in a 30 day period: 6, although 7 isn't unrealistic if I'm quick about getting the movies back out the door. But let's use 6 DVDs per month x $0.88 per DVD (not including their purchase price) = $5.28 in postage costs per month. Subtract that $5.28 from the $9.99 I'm paying now and Netflix gets paid $4.71 to let me stream their entire movie collection.

In 2010 it costs Netflix about $0.05 to stream a high definition movie, and predictions are their licensing fees for streaming media are going to increase to eleven times what they are now, it will soon cost them $0.55 to stream a movie to your living room. Let's say you only stream 3 movies per week -- that's 12 movies per month -- equals $5.28 in postage fees + $6.60 in licensing fees = $11.88 Netflix needs to take in, just to break even. Not pay the employees, or keep the lights on, or make any profit. That's $11.88 just to break even. So if they continued their $9.99 plan, they would be losing $1.89
per month, per customer... all ten million of them. Now how long do you think Netflix would be in business if they lost almost $19 million dollars each month?

So here's how the profit from their pricing plans today, versus what they're going to and why they have to do it:

Subscription Type	Streaming cost for 12 movies	Postage cost for 6 movies	monthly subscription fee	profit per subscriber

Old All Inclusive	12 x $0.05 = $0.60	6 x $0.88 = 5.28	$9.99	$4.11
If they continued old All Inclusive	12 x $0.55 = $6.60	6 x $0.88 = $5.28	$9.99	$-1.89 LOSS

New Streaming Only	12 x $0.55 = $6.60	$0.00	$7.99	$1.39
New DVD Only	$0.00	6 x $0.88 = $5.28	$7.99	$2.71

Both Streaming and DVD	12 x $0.55 = $6.60	6 x $0.88 = $5.28	$15.98	$4.10

So if you were to sign up for both packages and fork over $15.98 to Netflix instead of the $9.99 you are now, they will actually making the same profit each month ($4.11 vs $4.10) that they are today. Netflix is not not jacking up prices to cornhole their subscribers, they're simply passing their cornholing on to us. If you want to blame someone for the price increase, blame Hollywood (receiving 82% of your subscription fee) and their $100 million dollar movie budgets and actors that command $25 million per film, or the postal service (receiving 66% of your subscription fee). But isn't Netflix's fault.

0 Comments | Perm-a-link | 7/15/2011