Thursday, July 14, 2011

Netflix Knows What They Are Doing With Price Hike

If you are questioning why Netflix chose to execute a hefty price increase, don't think that this is another New Coke moment. Netflix knows exactly what they are doing and that there were going to be short term repercussions. Some subscribers will drop the service and others will downgrade. But the future for Netflix is not as a mailer of DVDs; no, it is to be a streaming media network. It is why the management structure has also changed to operate these two businesses more independently.

Notice that Netflix quickly announced a new deal with NBC for streaming content. "NBC Universal has renewed its deal with Netflix Inc., ensuring that programs such as "The Office" and "30 Rock" stay available on the popular service as it comes under pressure to pay more for its content and catches flack for a price hike." I suspect more announcements will follow.

And Wall Street seems to think that a price hike, despite a drop in subscribers, will not hurt Netflix. The physical costs of insertion of disks into envelopes and the high mailing costs certainly hurt the profitability; streaming involves far lower operating costs and thus a better margin. And given the consumers appetite for more, more content to view, those savings can help drive additional NBC-like deals. Remember too that Netflix is getting into the original content game as well, using the HBO/Starz/Showtime approach to differentiate itself from other content providers.

Netflix is proving itself a forward thinking company, willing to take short term risks to maintain a leadership position. It is ultimately a growth move to drive more investment and marketing to this mobile, online marketplace. Physical DVDs are past, streaming is the present and future.