Netflix Makes a Surprising Left Turn With New Pricing Approach

For a company that has done just about everything right for the past several years, yesterday Netflix took a surprising left turn, unveiling an unusually aggressive new pricing approach that raises its rates across the board. Though no rate increase will ever be welcomed by subscribers, this one has generated a massive amount of subscriber enmity, with scores of subscribers threatening to drop the service. The decision has wide-ranging competitive implications and could well mark another turning point in the evolution of online video.  

First, to recap the new pricing. In a blog post yesterday, Netflix VP of Marketing Jessie Becker announced that DVD-by-mail plans and unlimited streaming plans would henceforth be charged separately. As a result everyone who had some type of DVD plan must now also pay an additional $8/mo in order to access streaming content. That marks a stark reversal of Netflix's strategy of including streaming as a free value-add to DVD subscribers.

Rewinding history a bit, Netflix's approach not to charge for streaming content was likely the most strategic decision Netflix ever made. It allowed the company to leverage its DVD library's breadth to introduce millions of subscribers to streaming with no barrier to trial (i.e. no need to make a new decision whether the streaming content was worth paying for). The value prop was breakthrough: get massive choice with DVDs, but a convenience bonus with streaming.

The strategy succeeded brilliantly, creating a virtuous cycle where savings generated from fewer DVD mailings funded expanded streaming content, which in turn put more distance between Netflix and its competitors (arguably TV Everywhere being offered as a value-add by pay-TV operators was heavily influenced by Netflix's approach).

Now however, Netflix is forcing one of three poor choices on its subscribers: either go back to DVDs only (and lose all the nice streaming benefits, plus the core value of recently-purchased connected devices like Roku, Apple TV, connected Blu-ray players, etc.), go streaming only (and lose all the choice DVD offers since the streaming catalog is still just a fraction of DVD's), or absorb a very high rate increase to retain the benefits of both (for some the increase will be as much as 60%, from $10/mo to $16/mo). Compounding things, Netflix hasn't bothered to add an iota of new product value to any of these choices, so to the subscriber all that's visible are the negatives involved.

Whereas Netflix was in a prime position to gain more of its subscribers' entertainment time and consolidate its competitive advantages, the above choices will open new doors for competitors. Those that drop the DVD plan will gravitate to Redbox for cheap DVD rentals, those that drop streaming will gravitate to Hulu Plus, HBO GO and others. And those that absorb the rate increase will be just plain upset, shutting off the word-of-mouth spigot that has helped power Netflix's phenomenal subscriber growth.

You have to believe that Netflix is betting a large number of its subscribers will absorb the increase, turning its DVD business into a huge cash cow (Wall Street seems to agree, pushing Netflix above $300 today). Inertia is a powerful thing, but conversely, because over half of Netflix's subscriber base has joined in just the past year and a half, churn could also go through the roof. Add to the complexity that Netflix has temporarily lost Sony's movies in its streaming catalog and its Starz deal is in the process of being renewed. All of this sets up the remainder of 2011 as a volatile period for the company, with all bets off on where subscriber totals will come in.

Netflix has always been a "good guy" type of company, trying to over-deliver on value with subscribers' interests in mind. This new pricing move is a heavy-handed reversal, favoring its own financial motivations over subscriber goodwill and common sense. As such it will surely renew questions about whether Netflix's big spending on Hollywood content and its free unlimited streaming were sustainable. Netflix is entering uncharted territory.

Topics: Netflix