Video service splits DVD and streaming rental fees

Netflix is betting a dramatic price increase will help cover its rising content costs, but that’s not sitting well with subscribers.

Company announced an overhaul of its pricing plans Tuesday, eliminating a hybrid plan that offered unlimited streaming with a one-at-a-time disc rental

for $9.99. That offering will be replaced by two separate plans for unlimited streaming and disc rental for $7.99 each. The prices go into effect immediately for new subs while existing subs switch over on Sept. 1.

That means subscribers who want both streaming and discs would have to pay $15.98 per month, a 60% increase that’s expected to accelerate the phase-out of the mail-based system on which Netflix built its business more than a decade ago.

“I think they’re trying to exit the DVD business even though they say they are not going to,” said Dan Rayburn, an analyst at Frost & Sullivan.

“If Netflix subs go for streaming only, it frees up the money that went into mailing DVDs to put into licensing content digitally. And if subs want to pay for both, there’s enough money there to justify the cost of mailing the DVDs,” he said.

But in a post on its corporate blog, Netflix explained the separation of plans as a necessary move to protect disc rentals.

“Since then we have realized that there is still a very large continuing demand for DVDs both from our existing members as well as nonmembers. Given the long life we think DVDs by mail will have, treating DVDs as a $2 add-on to our unlimited streaming plan neither makes great financial sense nor satisfies people who just want DVDs.”

The decision sparked tens of thousands of comments on the blog, as well as Twitter and Facebook, complaining about the decision. Many vowed to drop Netflix and take up with competitors like Redbox.

But there wasn’t much outcry on Wall Street, where Netflix shares were up 53¢ at the close of trading Tuesday to $291.27. On Monday, the stock briefly inched up north of $300 for the first time ever.

The absence of outrage in financial markets may be attributable to the notion that even though ratcheting up prices could leave subs disenchanted, there’s faith that the move will increase revenues enough to pay Netflix’s growing content bill.

As if its licensing costs weren’t high enough in North America, the announcement last week of a planned expansion to 43 countries across Latin America and the Caribbean revived anxieties that the company won’t be able to afford all the programming required to be competitive across all those territories.

On the domestic front, Netflix still faces steep cost hikes such as the renewal of its deal with Starz for digital rights to films from Sony Pictures and Disney. Analysts have estimated the renewal could cost as much as $300 million, roughly 10 times more than Netflix currently pays.

All in all, Wedbush Securities analyst Michael Pachter has estimated Netflix’s content costs could reach as high as $2 billion in 2012, exponentially more than its current bill.

Pachter believes that Netflix is essentially forcing its customers to choose between discs and streaming, knowing full well few will stomach a 60% markup to hold onto both. The rationale, he believes, is “they’re trying to prove to the content providers exactly how many people are streaming” because that number affects the licensing feeds paid to studios.

Last month, Sony pics delivered via the Starz deal were pulled from Netflix because the sub total — potentially inflated by disc rentals — exceeded agreed-upon viewership caps.

Netflix also has a much thinner selection of content online than it does on disc, with five times as many titles available in the latter format. That’s a key sore point among subscribers, Rayburn said.

“If they had as much content to stream as they do on DVD, you wouldn’t be seeing such a revolt,” he said.

Netflix also disclosed that it will devote a separate management team to focus on its disc business. Andy Rendich, chief service and operations officer, will oversee the unit.

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