The Beginning of the End for Netflix?

Netflix Inc. (NASDAQ:NFLX) has been a reliable market leader for several years. It has shown investors returns of nearly 700% since early 2009.

But an announced price raise in the company’s cheapest content streaming and disc-by-mail package has attracted harsh criticism from users across the internet. Many customers are even threatening to cancel their subscriptions.

So, is this the beginning of the end of Netflix’s popularity and dominance of the movie rental biz?

Not likely.

But before I get into exactly why Netflix should continue to grow its business, let’s take a closer look at the price hike that’s created so much negative attention.

The change is in Netflix’s cheapest service level. The original plan allowed customers to stream movies over the internet and rent one DVD at a time through the mail. For $9.99 a month.

Netflix has now nixed this plan. They are forcing customers to pay $7.99 per month for a streaming-only service. And then another $7.99 per month DVD-by-mail service.

Keep in mind that most newer releases are not yet available for streaming over the internet. If a customer wants to see a movie that came out within the past couple of months, he would have to receive it by mail. So someone wishing to have the same access as the old $9.99 plan would have to fork over almost $16 per month now – that’s a 60% increase.

Despite such a drastic change, I doubt the higher priced plans will dampen Netflix’s long-term success.

Consider this: Netflix has spent the last decade squashing the competition. Alternatives are few and far between. Remember Blockbuster? Netflix crushed its entire store-based business model. Sure, Blockbuster has DVDs by mail now, but no streaming service. Despite the lack of new releases in its streaming library, Netflix still enjoys little serious competition online.

Redbox, owned by Coinstar Inc. (NASDAQ:CSTR), could be considered a more formidable competitor when it comes to new releases. The company’s automated movie rental boxes are convenient and cheap (as long as you don’t hold on to the disc very long). But again, there’s no streaming option here either.

The new releases issue is where much of the frustration lies. Customers are craving new, constantly updated streaming content— yet there’s nowhere to get it. This is the hurdle Netflix will eventually have to clear. But it’s nearly out of the company’s hands. According to the Wall Street Journal, “many studios’ films are tied up by long-term deals between the entertainment companies and traditional distributors like Time Warner Inc.’s HBO.”

A mass exodus from Netflix seems unlikely at this point— especially since customers have few comparable options. The initial shock of the price increase will eventually dissipate. Consumers will reluctantly fork over the extra money, just like they do for the much-maligned cable and satellite providers. Entertainment commands a distinct importance in American homes— and and extra $7 isn’t going to be the ultimate deal breaker.

Sincerely,

Greg Guenthner
Penny Sleuth

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