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Speaking of killin' golden gooses
Published on April 22, 2008 By terpfan1980 In DVD

I wrote another article recently about a day which will come... this article could share that same theme really.

If you check through this article: Netflix profit jumps, but stock drops on outlook you'll see this great little nugget:

Netflix will charge a "modest monthly premium" to its normal subscription price on Blu-ray discs later this year, the company's chief executive told analysts on the call. Explaining the decision, CEO Reed Hastings said that "purchasing Blu-ray DVDs costs more, both at retail and wholesale, than standard definition DVDs. Consumers are used to paying more for high-definition content ..."

... followed a little later with this nugget:

"With the success of Blu-ray and its emerging economic importance to the studios, the DVD market is more likely than ever to remain enormous for many years into the future," Hastings said.

Say no to surchargesInteresting expectations in both cases, and perhaps an idea that will work in Netflix's favor, but... it could also be one of the moves that helps kill Netflix's golden goose as customers (like me) get pissed off and opt to take our business elsewhere, including perhaps to movies viewed on systems like the Xbox 360 (via Xbox Live's Video Marketplace) or the Playstation 3 which will soon also offer a movie download service.

Netflix (and their competitor Blockbuster) must walk a tight-rope here and not tick off too many customers with a price increase just because they can (and that is pretty much and pretty clearly exactly what Netflix's CEO is saying in the first quote above, that they will institute a price increase because they know that consumers expect to pay more for higher definition).  Just because myself and others have paid more to get high definition into our homes doesn't mean we aren't price conscious customers and doesn't mean we'd be willing to just open our wallets and purses and pay more for the content we want to see.

The economy is in a slump virtually every where.  Gas prices are going up.  Transportation costs are going up.  The costs to ship and receive goods are going up (which is a place that Netflix and Blockbuster could point to as justification for a reason for increasing their monthly fees, rather than instituting a Blu-ray surcharge or tax).  All things that could lead to price increases from Netflix or Blockbuster if they wanted to use those excuses.  That isn't the case here though as Netflix is basically and plainly saying they expect customers that want the more expensive discs (Blu-ray discs) to shoulder more of the burden and cost.  I could almost see that being necessary but for a few factors.

First, back during Netflix's history DVD discs have come down in price pretty significantly.  During Netflix's earlier days DVDs were expensive items and unfortunately not highly durable.  Most especially TV series disc sets were quite expensive.  Sets like HBO's series (The Sopranos, Band of Brothers, Sex in the City, etc.) were outrageously expensive originally, and really were best obtained and viewed as a rental given the costs.  Sets like Smallville, or Veronica Mars, Heroes, and others were also expensive.  Prices for all of these sets have come down pretty drastically though, and meanwhile Netflix has turned those discs many times over.  They've likely been through dozens of hands and after the 10th rental, or maybe the 13th or 14th rental of any one of the discs in those sets the set was completely paid for and even the costs of shipping the discs back and forth through all of those customers were paid for, and then, well profit for Netflix.

Blu-ray discs do cost more, but the difference in price isn't that great.  A recent article I saw (sorry, can't recall where) mentioned a sweet spot for the difference between DVD and Blu-ray discs of the same items being set at approximately $7 - $8 per item.  That typically means that the DVD that runs just under $20 has a Blu-ray counterpart at $25 - $30.  Yes, I know that sometimes the greedy studios are charging, or attempting to charge, more.  They aim for the $35 and up range for some titles (greedy bastages!), but typically they aren't moving a lot of content in those higher price ranges unless or until there's a buy-one, get-one sale or some other sale that moves a lot of product that has been sitting in warehouses.

Netflix and Blockbuster may both be seeing a need to raise their prices here, and yes, the higher costs of the Blu-ray discs could be part of their higher operating costs but if they try to raise rates too much they may lose customers completely.  At $1 a month surcharge I'd likely complain but still pay for the convenience of being able to rent discs before buying them (and potentially wasting my money).  At $2 or more per month I'll be writing nasty-grams in my cancellation notices as I either go to the competitor (if they don't opt to play like the airlines and raise rates in lock step) or just drop the rental habit completely and instead put the costs of the monthly subscription to something that makes more sense, like say food or gasoline

Cooked GooseWe'll see if Netflix gets any traction with this idea of a Blu-ray surcharge.  Personally I hope note.  I hope that Blockbuster siezes upon the opportunity to nail Netflix for being greedy and launches a nice advertising blitz reminding potential customers they are the tax-free/surcharge free alternative.  If that happens Netflix will likely back down quickly and customers will continue to benefit.  If both raise their prices customers will begin looking elsewhere, rental rates may be drop and the movie studios will resume complaints that the economy is in the crapper and it's hurting their bottom lines, and oh, yeah, they'll likely complain about the lost income from piracy and illegal downloads that will continue to run rampant and may even pick up steam as customers look for cheaper alternatives to find the programs they want to see on their home theatre boxes.


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