Monday, July 18, 2011

Netflix's new pricing policy

Summer's here and I have been catching up on "The Wire" and Scorsese's Dylan documentary on Netflix.  I also have to decide which new pricing plan I want.

Netflix started with a simple pricing model where the monthly fee depended on how many disks you borrowed at a given time.  As a Harvard case we have used at NC State points out, Netflix's management knew there would be a day when video streaming would replace mailbox delivery.  Netflix rolled out streaming as a free add-on to the DVD-by-mail business model.  The online selection is still somewhat limited; only 8 of the 45 movies in my queue are available via streaming.  (Caveat: my queue is heavy on classic and foreign movies.) 

Last week Netflix announced that the streaming service would now be available separately for $7.99 per month and would no longer be a freebie for those with a mailbox rental plan.  So far newspaper accounts have focused on consumers who are less than pleased.

Yet there are opportunities for joint value creation as well.  The marginal cost of a digitally distributed movie is zero, as opposed to roughly $1-1.50 for mailing and handling of a DVD.  When a household  switches to the 100% streaming option, it will save $2 per month and Netflix will save even more, assuming the household rents three or more DVDs each month by mail. 

Those who wish to stick to 100% mail rental can avoid the price increase by going online before Sept. 1.   That's probably the route I will take until I trade in our current DVD player.

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