Oooh! That Evil Netflix! Why I'll Just…Wait. They're Going to Have to Pay How Much? Oh.

| July 13, 2011 | 15 Replies

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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Category: The Economy and Your Money

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