Netflix Price Hike: One Plausible Theory

By  |  Monday, September 19, 2011 at 10:08 am

Why did Netflix raise (most of) its prices in July? Weirdly, given all the consternation and CEO Reed Hastings’ mea culpa/rebranding announcement this week, it’s never explained its decision in anything like a direct manner. But venture capitalist Bill Gurley has a logical theory: Hollywood is treating Netflix like a cable company:

So here is what I think happened with Netflix’s recent price change (for the record, I have no inside data here, this is just an educated guess). Netflix has for the past several years been negotiating with Hollywood for the digital rights to stream movies and TV series as a single price subscription to users. Their first few deals were simply $X million dollars for one year of rights to stream this particular library of films. As the years passed, the deals became more elaborate, and the studios began to ask for a % of the revenues. This likely started with a “percentage-rake” type discussion, but then evolved into a simple $/user discussion (just like the cable business). Hollywood wanted a price/month/user.

This is the point where Netflix tried to argue that you should only count users that actually connect digitally and actually watch a film. While they originally offered digital streaming bundled with DVD rental, many of the rural customers likely never actually “connect” to the digital product. This argument may have worked for a while, but eventually Hollywood said, “No way. Here is how it is going to work. You will pay us a $/user/month for anyone that has the ‘right’ to connect to our content – regardless of whether they view it or not.” This was the term that changed Netflix pricing.

 
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6 Comments For This Post

  1. Stynkfysh Says:

    Netflix's streaming content selection is 95% terrible. This is my opinion and the opinion of others I know who have it. They need to generate more revenue to get better content or they will be unseated by someone else. Some TV networks have already released streaming apps for iPad which take the wind out of Netflix's sails – and this is only going to get worse. Netflix's best days are behind it if it can't at least get HBO quality programming. Its great they have a bazillian things they can steam – but most of it is unworthy of our dollars.

  2. JohnFen Says:

    HBO quality? I guess we differ on what consists of “quality”. HBO is, imo, not anywhere near worth the money. Nor is cable TV in general. Netflix, however, is, although less so than before. If the prices continue to go up, or if they implement a tiered plan, then Netflix will lose that status in my eyes.

  3. jltnol Says:

    Just as Hollywood is starting to treat Netflix as a cable company, Netflix will start to treat it's customers as a cable company.

    Look for low, entry level fees for old content, then upgrades to newer content, and finally, pay per view for newest content…. you know… just like your cable company does now….

  4. JohnFen Says:

    @jtnol:

    I’m sure that you’re correct, and that’s what makes me sad. Most of the appeal of Netflix streaming, for me, wasn’t the price as such, but that it let me once again have access to instantly available programming without having to deal with a cable company. Price is important, of course. Cable TV is expensive — even their cheapie plans are expensive, and you don’t get much for the money. Certainly not access to a decent library of older content. You get junk like broadcast TV or the cable equivalents of broadcast TV. And there is no programming at all that is worth more than about $30/mo (at the high end) to me.

    If Netflix follows that path, that’s the end of Netflix as a worthwhile service. And that makes me sad.

    On the other hand, if the DVD business continues, that takes the edge off a bit. The DVD service has always been of greater value to me than the streaming service, even if it is slightly less convenient.

  5. Dave Says:

    Well at least that makes some sort of sense.

  6. george curran Says:

    bdon
    Within a week I heard on the news that Netflix was raising prices. By onlinebanking I learned they already raised my prices. Today my wife told me she saw a TV commercial showing that Netflix was offering membership for $8.00.. A few months ago I quit them because they raised my prices to $21 per month without notifying me.