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I’ve seen a lot of sturm und drang on the ‘net over the announcement from Netflix that they’re going to split their DVD and streaming packages and charge a bit more for both. Since I don’t immediately buy into the notion that successful companies do things to anger their customers for no good reason, I did a little bit of research.

Guess what? Netflix doesn’t have much of a choice. They’re looking at some very large expenses over the next three years for which they’ll need to pony up far more money than they’ve had to spend so far. These expenses are not the fault of Netflix but the movie studios.

You Netflix folks might remember a little episode recently where a whole gob of Sony movies disappeared from Netflix Instant. The company gave a suitably vague reason why it happened along with an assurance that the situation would be fixed soon. That incident was actually the first sign of a very big problem for Netflix that’s only going to get worse unless it takes fairly drastic action, like, say, a rate hike.

Several years ago, Netflix made deals with several movie studios to buy the rights to stream those studios’ libraries for relatively little. Since then, the streaming movie market exploded, to the point where Netflix is worth a couple hundred million and other companies like Hulu and Amazon are looking to expand their own presence. You know what happens when you have more than one bidder for a product, right? The price goes up. That’s exactly what’s happening with Netflix. One estimate has Netflix licensing costs rising from about $180 million last year to almost $2 billion in 2012 - an elevenfold increase.

What does that mean for Netflix? Well, do the math.

So if Netflix wants to continue getting Disney and Sony new movies via Starz, it will have to pay the equivalent as Starz’s conventional licensees. In dollar terms, according to industry insiders, this will mean that Netflix will have to pay an additional $300 to $400 million a year to stream new movies.

And this is just the beginning.

As Netflix’s other contracts expire in 2012-3, its other content suppliers, including television networks, will also hike the price. To stay in the game, Netflix’s licensing cost will rise, according to the estimates of content providers, by at least a half billion dollars. That is in addition to the $1.2 billion it is presently paying to license digital content (including its deal with EPIX).

Netflix would require 5 million or so new subscribers to offset the additional $500 million cost. Finding them will be far more difficult than when it launched its service and had no formidable competition in the streaming arena.

But Netflix does have competition, and it’s going to need ready cash to get deals done as soon as it can. So while it’s trying to add new subscribers, it also has to get more money from the subscribers it has right now. And don’t think that you’ll be able to skip over to Amazon or Hulu and find amazingly-low prices. Any company is going to have these costs right now. So long as you want a wide selection of fairly-recent movies delivered right to your television automagically, the companies who provide them to you will have to pay whatever price the movie studios demand.

Supply and Demand 101, right?

There is a bright side, though. The monthly expected cost of both streaming and DVD service is still less than a night at the movies for two people. It’s lower than the rental plus late fees you’d likely pay to a brick and mortar store if you happened to keep a couple movies past their return dates. For that price, you still get movies and television shows whenever you want them, in high-definition, with great sound. Yes, it stinks that you’ll have to pay more than 8 or 10 dollars, but it’s not Netflix’ fault. Don’t blame them too much.


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14 Responses to “Oooh! That Evil Netflix! Why I’ll Just…Wait. They’re Going to Have to Pay How Much? Oh.”

  1. mozarkite says:

    Netflix's streaming is pretty bad. The movie "hangs" and won't download, sometimes for minutes rather than seconds, there's the issue of availability (most of their downloadable library is pretty old, movies (eg The Godfather trilogy) are available for 3-6 months and then they are no longer available)….When I first read netflix intended some day to be ALL streaming, I wondered how they would address those issues,AND just how they would charge for streaming (Flat monthly rate? So many hours a month total? By the film?) I knew they wouldn't be able to stick to the now cancelled plans. So I am not as upset as others, as I knew *something* would have to change, if only to pay for the massively increased server capacity that will be needed. We have 2 out, unlimited streaming, which will go from (roughly) $20 a month to (roughly )$25 a month. Still a pretty good deal…For now. We also have amazon prime, so we will probably use that service a bit more, and if it + Hulu is a better deal than netflix, well….But for now, we'll stick with netflix. For now…

    • Jimmie says:

      That's a reasonable look at the situation. Netflix is going to have to work harder to keep its customers. The knee-jerk reaction to a pretty reasonable rate increase is unwarranted, but insisting that the company give good service for the cost certainly isn't.

  2. NJRightWinger12 says:

    Theyre not getting one thin DIME out of me! And this rate hike-theyre BLUFFING!

  3. SergeantYork says:

    Problem is, good business doesn't increase price without increasing service. The best business models increase prices on new customers while keeping the same pricing tier for existing customers. Hiking a price without getting better service (and let's be realistic, even when the streaming works perfectly, the selection sucks), even if it does only mean an extra six bucks a month for me, is not good business. I'll be dropping my DVD account because I can do Red Box for a buck per rental as opposed to Netflix 2 or more dollars per.

    • Jimmie says:

      That's fine, but how would you handle a cost that increased over 2 years elevenfold? Do you think you could get new customers if you charged them four times what you charge existing customers? I doubt it. It seems a far smarter move to increase costs to existing customers a modest amount (and let's be honest here, $20 for all the movies you can watch is a piddling amount that was undreamt of just a few years ago).

      You can get all indignant if you like. I'm only suggesting that I don't see where Netflix has a much better option.

      • cottonjenny says:

        I don't disagree with you, but still Netflix is handling this rate hike poorly. Why aren't they explaining their cost increases to the public the way you have? The only reason that comes to mind is the same reason why they charged Canadians less, and why the movie reviews were all messed up for a month+, etc. Because they seem to hold their customers in contempt. Whether or not this is really true doesn't matter-it's the perception that's widely held out there, and why many people will leave-because they don't feel valued.

        • Jimmie says:

          I agree that Netflix didn't handle the PR well. At all. Bad PR is still, I think, the rule around corporate America, rather than the exception. I admit, I was surprised that Netflix wasn't on top of this. Maybe they'll do better in the future. If not, well, there are competitors, no?

      • SergeantYork says:

        There is a huge difference between "All the movies you can watch" and "all the movies you WANT to watch. Just because a Buffet is all you can eat, doesn't make it good, unless there is a wide selection of food the customer WANTS to eat. Old, stale, bad food does not make a good buffet, nor do old, stale bad movie make for a good streaming service.

        Netflix streaming, with its current selection, is NOT worth 8 bucks. And since the most I can get with a one-at-a-time plan is 4 movies a month (a movie a week if the mail is moving well, makes for 2 bucks a rental - again, when the service is working well - more worth it than the streaming service, but still twice the price of red box.

  4. Tradesguy says:

    I have both with netflix. Still have cable and redbox down the street. Hollywood are greedy pigs and over pay their communist actors way too much. goodby netflix,your marketing will backfire on you and in the end hurt the dummies in hollywierd as well.

  5. mrpither says:

    This article makes some good points and even at the increased price Netflix is a good value. One problem for me in all this is the way it was handled from PR and loyality to its customers perspectives. My second problem is that choosing just one or the other isn't really a good option. Eighty percent of the items in my queue aren't available via streaming. Streaming is also a problem in that my ISP can't handle the traffic at some times of the day, particularly evenings, which means I either have to wait for odd times or settle for a much lower quality picture.

  6. buzzyboop says:

    You have to look at all service tiers to get an average price increase. Price increases are lower the higher the tier you're at. I am at the 4 DVD + streaming. My increase was only $2 a month. Although I also got hit with a separate $3 increase the beginning of the year. To me, it looks like the lower tiers got hit with the biggest increase.

  7. Your Morning Call Sheet: Netflix Blues, More Spider-Man, Shatnerpalooza, and a … | DVDs4Trade says:

    [...] at the Sundries Shack is mostly on Netflix’ side: Netflix doesn’t have much of a choice. They’re looking at some very large expenses over the [...]

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