Peter Kafka

Recent Posts by Peter Kafka

Reed Hastings Doesn’t Want You To Pay More For Netflix. He Wants You To Stop Using DVDs.

Why did Netflix raise its prices by 60 percent yesterday?

Reed Hastings’ company says it’s a cost issue. If people are going to use both his DVD-by-mail service and his Web video streaming service, he’ll need more money to support both businesses. That’s probably true.

Here’s what’s more true: Reed Hastings doesn’t want most of his customers to pay more. He wants them to pay less, and drop DVDs in favor of a streaming-only service.

To recap: Yesterday, Hastings kept the price of his streaming-only video service at $8 a month. But he raised the price of his companion DVD-by-mail service from $2 a month to $8 month, which will push many subscribers’ monthly fees from $10 a month to $16 a month.

Unless they stop using DVDs. Which seems to be what Netflix wants. Even though they haven’t said so out loud, to date.

Still, the message seems to have gotten through to Wall Street. The move is designed to “further drive streaming-only plans and adoption,” says Barclays’ Anthony DiClemente. Same sentiment, with more flourish, from BTIG’s Rich Greenfield: The price hike “is aimed at killing off the DVD business as fast as possible,” he says.

It is also resonating in Hollywood. A studio boss I talked to yesterday says Hastings instituted the price hike “because people aren’t moving to streaming fast enough. He’s trying to force them to go faster.”

The problem, as every disgruntled Netflix subscriber on the Web can tell you, is that Netflix streaming and Netflix DVD are two different beasts: Netflix on the Web gives you instant gratification, but has less than 20 percent of the content that Netflix DVD-by-mail options give you.

The reason Hastings can offer a much bigger DVD catalog is because he doesn’t have to get permission from Hollywood to rent out its discs — he just needs to buy them. But every movie he streams is licensed from the studios, at a cost that’s only going to get higher.

And while Hastings never has to worry about getting “The Social Network” on disc, streaming deals give Sony the ability to cut off his digital access completely. As has already happened, at least temporarily.

So doesn’t upping the number of streaming subscribers give the studios more leverage?

In the near-term, yes. But Hastings seems to be betting that the studios will continue to give him digital access, as long as he keeps writing them checks, no matter how much they posture.

And every digital deal — and every digital customer — he accumulates gives him that much more bargaining power.

Netflix has lots of potential competitors, but the only service that’s really offering something competitive at the moment is Hulu with its Hulu Plus subscription offering, and that’s on track to accumulate something like a million subscribers this year. Netflix was 24 million last quarter, and will likely report a couple million more during its earnings call this month.

Meanwhile, if Hastings really does convince subscribers to abandon DVDs altogether, he can drop his costs significantly. I’ve been paying for, but not using, his DVD service for the last year. But the fact that I might drop a disc in the mail and ask for another one means Hastings has to keep an expensive infrastructure up and running.

Of course, none of this means anything if Netflix subscribers stop using the service altogether.  Which is the impression you’ll get if you scan the wave of angry commentary on Twitter and the Web (I contributed some mild-mannered grousing myself).

Except that Twitter and the Web are pretty much designed for angry commentary. And measuring discontent via the number of Facebook complaints doesn’t really make a lot of sense, unless those complaints get up into really, really big numbers.

Remember that Netflix is already used to fairly high churn rates of about 4 percent, which means that about a million of its 24 million existing subscribers are going to go anyway. And bear in mind that Netflix takes enormous pride in the data it collects on its users’ behavior. I’d be very surprised if they haven’t modeled a scenario where thousands of people complain about the service change on the Web.

Postscript: Then again, maybe Netflix didn’t model quite as closely as they could have. The company, famed for its excellent customer service, seems unable to handle the volume of calls the price hike has generated. Here, via Greenfield, is the message you’re most likely to get when you call Netflix today.

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Another gadget you don’t really need. Will not work once you get it home. New model out in 4 weeks. Battery life is too short to be of any use.

— From the fact sheet for a fake product entitled Useless Plasticbox 1.2 (an actual empty plastic box) placed in L.A.-area Best Buy stores by an artist called Plastic Jesus