Thanks to Hollywood, Netflix Is Pricing Itself Out of a Business

Want to watch streaming video and still get an occasional DVD? If you use Netflix (NFLX), prepare to see your bill jump by 60 percent. The company just dropped that bomb today, couching it in as a move to "better reflect the costs of each" and "give our members a choice" of streaming only, DVD only, or both.

OK, so the combination streaming and one-DVD-at-a-time plan technically was a way to get both. Or you could pay just for streaming or just for DVDs. But this isn't about you. It's about the studios and a big problem about to drop on Netflix's head. The Hollywood studios who own the video rights want more money. A lot more money.

That means Netflix has to pull in a lot more to pay higher licensing fees. The only question is, will the company alienate its customers and push them into the arms of such rivals as Hulu and Apple (AAPL)?

Studios like money -- lots of it
Michael Pachter, an analyst at Wedbush Securities, thinks that as soon as Netflix's streaming contracts are up in the next few years, studios will renegotiate for a lot more money. How much more? Maybe ten times as much as they get today. And the future for Netflix is streaming, which explains why the FAQ section describes Netflix as a service for online video with the DVD service described as an add-on. (Wait, what happened to a choice of DVD or streaming?)

Pachter's estimate may or may not be accurat. But if you've spent any time watching how the studios negotiate with producers, actors, writers, theaters, online video companies or anyone else, you can see a pattern of hardball negotiation. When they have the upper hand, they push to get more.

Their way or the super information highway
From their view, the studios have nothing to lose. They like traditional programming carriers that pay a lot more for video. They'd be just as happy to see all the streaming disappear and everyone move back to a Golden Time when consumers paid plenty for bundles of cable channels because they didn't have any alternatives. They have no love for streaming, unbundled video, or the inevitable breakdown of traditional television and movie distribution.

And yet it is coming. DVD sales have reportedly fallen 25 percent in the last five years. The DVD market, like that of VCR tapes before it, is a critical one for Hollywood's business model. Release a film in theaters, move it to pay TV, and then eventually go to DVD, with special director's cuts and bonus content all geared to sell multiple copies to fans or to increase the average selling price.

Online video so far has done to the studios what it did to the labels. Prices are lower and people can pick and choose exactly what they want. Studio executives don't want to reconcile themselves to making less, so they work in an almost reverse marketing mode. First they decide how much they need to make, then they push prices that will bring in the desired revenue.

In the case of streaming, it's fine with them if costs to end users suddenly had to go up several times. That just increased the chance that consumers go back to cable, satellite, or other service that makes the labels more comfortable.

We know you want to do what's best for us
Netflix's spin, however, is unfortunate for its marketing efforts:

Last November when we launched our $7.99 unlimited streaming plan, DVDs by mail was treated as a $2 add on to our unlimited streaming plan. At the time, we didn't anticipate offering DVD only plans. Since then we have realized that there is still a very large continuing demand for DVDs both from our existing members as well as non-members. Given the long life we think DVDs by mail will have, treating DVDs as a $2 add on to our unlimited streaming plan neither makes great financial sense nor satisfies people who just want DVDs.

But eventually Netflix could get to the point the cable companies have hit, where it's so busy extracting the sums it wants from customers that it fails to notice that customers aren't getting adequate value in return. And when feel like they're getting taken to the cleaners, suddenly they're not all that loyal. As you can already see in the comments to Netflix's latest pricing announcement.

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