Netflix Price Hikes Aimed At Pushing Subs Away From DVDs: Analysts

Author:
Publish date:

Netflix's elimination of bundled DVD and Internet streaming plans -- effectively a price hike for customers who want both services -- is designed to push subscribers toward the more-profitable streaming-only option but will result in higher churn, according to analysts.

The company cited the need to better reflect "underlying costs" in announcing the change, which will increase the price of the one DVD-out-at-a-time plus streaming by 60%, from 9.99 per month to $15.98 ($7.99 for streaming and $7.99 for the one-DVD plan).

"It would seem that NFLX is trying to push subs to streaming and/or using discs to fund the rising cost of digital content," Janney Capital Markets analyst Tony Wible wrote in a note.

Multichannel News cover story Jan. 31, 2011

Netflix's stock price was essentially unchanged Tuesday, closing at $291.27 per share. It was up about 3% in trading Wednesday, to over $300 per share.

Netflix has said it costs about $1 per DVD for shipping and handling, whereas streaming a full-length movie over the Internet is estimated to cost 5 cents or less. In 2010, Netflix paid more than $500 million to the U.S. Postal Service to deliver DVDs by mail.

Netflix's pricing changes will likely result in increased churn, according to Piper Jaffray senior research analyst Michael Olson. The firm now projects churn of 4.3% in calendar year 2012 vs. its previous estimate of 4.0%. At the same time, the increase in revenue will more than offset higher churn, he added.

"If customers choose to abandon DVD-by-mail and downgrade to the streaming-only plans, ARPU [average revenue per unit] would fall, but profitability would rise and Netflix would more quickly accomplish its goal of becoming an Internet-streaming service," Olson wrote. "If subscribers maintain both DVD-by-mail and streaming, then ARPU will rise, and the profitability of the DVD service will also rise to be more in-line with that of streaming."

For 2012, Piper Jaffray now estimates Netflix will generate average revenue per customer of $10.88 vs. its previous estimate of $10.60. About 75% of Netflix subscribers use "Watch Instantly" streaming, Olson estimated.

BTIG Research analyst Richard Greenfield wrote in blog post that "we believe the dramatic price increase on hybrid DVD-by-mail/streaming service plans is aimed at killing off the DVD business as fast as possible."

"While $16-$18/month for a DVD/Blu-ray disc plus streaming is still a great entertainment value for your whole family, comparable to the cost of a single IMAX 3D movie ticket in a major city, we suspect a large percentage of customers will now be forced to make a choice," Greenfield wrote.

DVDs are variably priced, while streaming has a fixed cost, Greenfield noted. "Netflix has substantially more operating leverage in its streaming business as it signs annual/multiyear programming/content deals, which are not impacted by subscriber growth, whereas its DVD business requires the purchase of more DVDs to support more customers and often has revenue sharing attached to each transaction (plus postage both ways is far more costly than streaming one-way)," he wrote.

Since adding the "Watch Instantly" streaming in 2007, Netflix's subscribers rolls have grown from 6 million to 22.8 million in the U.S. as of the end of March 2011.

The pricing changes are effective immediately for new Netflix members, and will start for existing subscribers on or after Sept. 1, 2011. Netflix is establishing a separate management team solely focused on DVDs by mail, led by Netflix chief service and operations officer Andy Rendich.

Los Gatos, Calif.-based Netflix offers more than 20,000 titles available for instant streaming over the Internet, available on more than 200 different devices. It offers a catalog of more than 100,000 DVDs available via mail.

Related