It had to happen eventually, Netflix fans. Not even one year after Netflix (NASDAQ: NFLX) began offering monthly subscriptions solely to its streaming video service, free of the by-mail DVD rentals that put the company on the map, the hottest stock in home entertainment has adjusted its pricing. As of September 2011, Netflix no longer will allow subscribers to pay less than $10 per month for both DVD rentals and streaming video. Subscriptions to streaming and by-mail services will each be $7.99 per month for NFLX customers.
Some are happy with the changes, and some aren’t. Consumers are voicing their outrage with the price change on Netflix’s Facebook page. A post detailing the change in policy racked up nearly 36,000 comments in the day after the announcement, the vast majority of those being negative. Still, that many disgruntled customers hardly are a problem when compared to an overall audience of more than 25 million subscribers.
Netflix’s content partners are undoubtedly pleased with the rate hike. A Wednesday report at CNN said Comcast (NASDAQ: CMCSA) subsidiary NBCUniversal renewed its multiyear contract with the streaming video business after the pricing adjustment, guaranteeing that subscribers still will get access to TV shows like “30 Rock.” Wedbush Securities analyst Michael Pachter predicted in April that the license for NBCUniversal’s content rose to $275 million this year, compared to the $22 million Netflix paid in 2010.
Therein lies the explanation for the increased subscription fees for Netflix’s service. Content providers need to make their money somewhere, and a migration of more than 20 million viewers to Netflix’s service from cable, satellite, broadcast services, and DVD stores like Best Buy (NYSE: BBY) means the salad days of ultra-cheap streaming services are over. Netflix’s total licensing costs in 2010 came to $180 million. Pachter thinks they’ll hit almost $2 billion by 2012.
Should investors be worried that the outcry over the rate hikes spells disaster for the ascendant Netflix? Absolutely not. The increase in subscription fees proves Netflix is doing everything it can to satisfy its content partners at the same time as phasing out the obsolete parts of its business model. Disc-based rentals, whether DVD or Blu-ray, simply won’t be profitable for Netflix by 2015 (and likely earlier than that). The transition to a higher-cost, streaming-only business model needs to begin sometime. Consumers shouldn’t fret, either, as increased costs also likely will bring along an increased selection of content. Paying more money per month for a broader library of movies and television that includes recognizable programming rather than trashy direct-to-DVD “Transformers” rip-offs hardly seems like a bad deal.